kapferer on luxury – how luxury brands can grow yet remain rare_nodrm

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Other books byJean-Noël Kapferer published by

Kogan Page

The Luxury Strategy: Break the rules of marketing to build luxury brands , Second edition, by Jean-Noël Kapferer and

Vincent Bastien(isbn 978 0 7494 6491 2)

The New Strategic Brand Management: Advanced insights and strategic thinking , Fifth edition, by Jean-Noël Kapferer

(isbn 978 0 7494 6515 5)



Note on the Ebook EditionFor an optimal reading experience, please view large tables and gures inlandscape mode.

This ebook published in 2015 byKogan Page Limited2nd Floor, 45 Gee StreetLondon EC1V 3RSUnited Kingdom

www.koganpage.com

© Jean-Noël Kapferer 2015

E-ISBN 978 0 7494 7437 9

Full imprint details

http://www.koganpage.com/



CON TENTS

Intro duction: Growth issu es for luxury

PART ONE How luxury is changing

01 Sust aining the luxury dream: challenges and

insig htsAn industry like no otherThe f uture(s) of luxuryThe rise of fashion: from dream to contagion ofdesiresFacing high demand and abandoning rarityHow will China influence the dream?

The challenges of the internetAgainst the blurring of lines: recreate the gap,transgress the codes

Sustainable development: the future dream of luxuryReferences

02 Abundant rarity: the key to luxury growthLuxury financial dreamThe many meanings of luxuryHow scarcity creates valueFrom scarcity to qualitative rarityIntroducing virtual rarity



From craft to art: elitism for allThe new reality of Asia: egalitarian luxury?Is the cult of luxury religious?Nurturing the symbolic power of the luxury brandShort-term or long-term policy?Conclusion and clues for entrepreneursReferences

03 The artification of luxury: from artisans to artistsThe challenge of growth for luxury companies

The radical transformation of luxury todayHow growth creates two major problems for luxurybrands

Luxury growth and the rising issue of legitimizationWhy art now? Becoming an industryA short history of the relationship between art and

luxuryWhat’s in art for luxury?Entering new countries through artHow artification involves all art institutionsInvolving all artists at all levels of the value chainThe multiple media of artificationConclusion: an ambitious vision for luxury?References

PART TWO Specific issues and challenges

04 Luxury after the crisis: pro logo or no logo?



From absolute to relative luxuryModern economies trigger status needsAdapting the price and logo to different segmentsWhy conspicuousness will come back: it never left!Back to luxury?References

05 Why luxury should not delocalize: a critique of agrowing tendencyFrom a well-kept secret to an overt announcementLuxury: do not confuse the concept, the sector and thebusiness modelLuxury brand building is about building

incomparabilityDo not confuse luxury, fashion and premium business

models

The consumer opinion on delocalizationSustaining ‘made in’ as a real brandThe challenges of non-delocalizationReferences

06 Internet and luxury: under-adopted or ill-adapted?The new frontier of luxuryLuxury and the internet: a reciprocal myopiaRevisiting the potentialities of the webClouds over the internet: the loss of controlAdapting the luxury organization to the web



Transforming the web to adapt to luxuryReferences

07 Does luxury have a minimum price?: anexploratory study into consumers’ psychologyof luxury pricesThe elusive luxury definitionPrice and luxuryThe paradox and research question: How expensive is

expensive?Results and insightsSummary of the findingsImplications for luxury price managementConclusionReferences

08 All that glitters is not green: the challenge ofsustainable luxuryLuxury under pressure of sustainable developmentLuxury and SD share two deep concerns: rarity and

beautyDistinguishing the luxury strategy from a fashion or

premium strategyLuxury is by definition durableWhy this present SD focus on luxury?Acting as an SD model to preserve luxury reputationIs SD ready for luxury standards?How SD needs a luxury strategy too



Status redefined: from power to altruismReferencesFurther reading

PART THREE The business side of luxurybrands’ growth

09 Not all luxuries act alike: the distinct businessmodels of luxury brands

The desire for luxuryBehind a single term, multiple business modelsWhat discriminant criteria differentiate business

models?Global competition between models of luxuryReferences

10 The LVMH–Bulgari agreement: what changesin the luxury market lead family companies tosell up?IntroductionThe Bulgari acquisition: a model for family-owned

luxury brands?Luxury transformation: from manufacturer of rareproducts to creator of retail experiences

Closing the gap with Cartier and TiffanyChina: the capital dilemma for family-owned luxury

companies



Why the source of capital is not inconsequentialThe price of Bulgari: too high, or an accurate

measurement of the financial dream?High growth assumptions: no brand equity dilutionConclusionReferences

11 Developing luxury brands within luxury groups:synergies without dilution?Luxury concentration in questionHow luxury groups growTheoretical background: how groups create valueResearch objectives and methodologyFindings of the transversal analysisImplications for growing luxury brands within groupsReferences

Index



IntroductionGrowth issues for luxury

Luxury is an industry like no other: it is the only one fowhich growth creates a problem. Is a lack of demand thsource of the problem? No, the problem is just thopposite: excess of demand. For example, how many moFerraris should the brand sell each year withouendangering its dream value and prots? Should Hermdecide not to sell more Kelly bags this year than last yeaWhen should Louis Vuitton decide to reduce its number o

stores in a given country?Yet, outside the doors of luxury stores, ordinary peoplwant to access the ‘banquet’. They can now enter thwebsites and social networking pages of these storeLuxury symbolizes their access to a life that is as happy the celebrities’ they observe wearing such luxury dresseswatches, which they have long been coveting frowatching Western movies, news and television series.

In the luxury market, clients not only buy aexceptional product – partly handmade, with the savoirfaire of artisans – but also a legend: a great tradition madmodern to t one’s present life, a culture anchored in a



country. In addition, they also buy exclusivity, though thidoes not mean buying the only copy in the world. Luxuproducts are not paintings. Exclusivity means that thbrand is purposely limiting demand: the higher pricreects the price paid for gaining the right to be associatewith selected, afuent co-consumers. To paraphrasGroucho Marx: ‘I would never want to be part of a cluthat would accept me.’ This exclusivity factor is whdistinguishes luxury from premium brands and, all thmore so, from masstige (mass prestige) brands. Mercede

Benz now competes against Audi, BMW and Lexus volume: with BMW leading the ock with 1.66 milliocars sold in 2013. Should there be a limit to the saleobjectives of Mercedes S-Class in the forthcoming yeaProbably not. In contrast, Rolls-Royce will purposely seone car less next year than this year, but each car will btailor-made. The company makes more money bcustomizing each Rolls-Royce to the individual owner thby selling one more car. Doing so creates the image omore exclusivity and value. Managing a luxury brand donot mean running after the maximum number of customebut rather the right ones associated with their own statusGoods are chosen when one knows who else is selectiand wearing them – for example, fashion relies heavily celebrities to sell its products. However, luxury is nofashion, as is discussed in The Luxury Strategy (201which I co-authored with Vincent Bastien.

Growth in luxury is a fragile concept and a mixeblessing. When does saturation occur? Too few client



prevent brands from covering the considerable xed cosof luxury retail. Today, niche is out: an unknown luxurybrand cannot accumulate the symbolic capital needed endow its clients with status and respect. But too manclients endanger the exclusivity factor and the luxuexperience of these clients. How many people are nowearing Chanel eyewear logos on the streets of Paribought in regular optician chain stores? Even in agshstores the luxury in-store experience can become damagbecause of the long queues and the lack of attention fro

minimal staff. What level of service is really deliveredthe retail stores of luxury brands? At stake here are thbrand value and its ability to command a high pricpremium without any form of justification.

Luxury as a sector is becoming consolidated as a resuof the problems raised by growth. How fast should a rmgrow? Where in the world should it do so? How mucvolume should it sell? According to Bain & Company datItalian brands have the highest rate of sales growth in thworld, even higher than French brands. However, many othe Italian icons have been bought by French groups (suas Moët Hennessy Louis Vuitton (LVMH) and KeringGrowth needs cash and know-how, and family companiemay not have enough of either. Many formerlindependent family companies have sold to luxury groupeven those that said they would never do so (such Bulgari, Loro Piana and Gucci). By contrast, some famicompanies, such as Hermès and Chanel, are great casmachines and remarkably profitable.



Wall Street interest in luxury groups rests on twparameters: the ‘luxurious margins’ that this sectoprovides and the growth of the market. Therefore, becausluxury groups are listed on the stock exchange, there wibe continued pressure on growth objectives, something ththe independent family companies will not have to bear. Sfar, Wall Street has been well served by the boominexpansion of this industry since 1990:

• Horizontal expansion has occurred, due to the

conquest of the BRIC countries (Brazil, Russia, Indiand China) and now the MINT countries (Mexico,Indonesia, Nigeria and Turkey). China is the mostsymbolic and powerful proof of this expansion. Anexample is the success of Louis Vuitton in China: thbrand now symbolizes the economic success of thecountry itself, with stores opening in first-tier andnow even second-tier cities.

• Luxury brands have also experienced verticalexpansion, with the creation of second and thirdlines. The most typical example is Armani. Anothersign of vertical expansion is the growth of accessorias a major source of profitability.

• Luxury brands have also engaged in diversification,abandoning their former single specialization toencompass a wider range of products. The goal of such brand extension is to profitably develop directloperated stores. Diversification is also an answer to



the problem created by new clients of luxury – thatis, the absence of loyalty. New clients choose brandby contagion of desire, not by adhesion to theirvalues, nor by connoisseurship. Extension of luxurylines provides another reason for consumers to visitboutique stores or company websites.

But what comes next, after horizontal and verticaexpansion and diversication? More of the same? Howthen, will the luxury sector overcome the chasm betwethe images it promotes – continuously dening luxury rare, noble, crafted, exclusive, spirited, elevating anservicing – and the realities of business growth?

This book aims to propose insights into possiblgrowth issues for luxury, and maybe even foresight. Wanalyse the current ‘artication’ of luxury and the rise o‘abundant rarity’ strategies that help to sustain the luxurdream with higher volumes. We also discuss the internchallenges in a renewed way and present sustainabdevelopment issues. Finally, we address the managemeitself of luxury companies and groups.

The book includes some of my recent articles (some cauthored) published in international journals, addressin

the issues of growth and its many distinct facets. Each them can be read on its own. In addition, it includeseveral original chapters pertaining to issues not covered these published articles and new data from our latesinternational research on the levers of the ‘luxury dreamin the minds of the customers in the luxury sector. Thi



book serves as a companion book to The Luxury Strategwhich remains the international reference for managinluxury brands in a distinctive way, to sustain the gabetween luxury and fashion or premium.



PART ONEHow luxury is changing



01Sustaining the luxury dream

Challenges and insights

Luxury sells dreams. The more the luxury sector grows as it has been doing since the mid 1990s – the more ththreatens the levers of the luxury dream and the essence what luxury evokes: the notion of rarity and of access toprivileged life, to products of exception – and to a life exception. We review here the main facets of this markgrowth that challenge the luxury dream and itsustainability: the dominant weight of the Chinesconsumers; the central role of the internet and socinetworks in consumers’ behaviour; the blurring of frontiebetween luxury, fashion, premium and masstige (mas

prestige) brands; the new demands of sustainabledevelopment.

An ind ustry like no other



Luxury sells dreams. Luxury magazines regularly featuarticles citing dream places to visit, dream houses purchase, dream yachts, dream cruises, dream cars, dreamwatches and so forth. Headed by CEO Bernard Arnaulthe world’s leading luxury group LVMH sells billions odollars of items that promise to ‘fulll the hopes andreams of consumers’ (Harvard Business Review, Octob2001). As Robert Polet, former CEO of the world’second-leading luxury group explained, ‘We are in thbusiness of selling dreams’ (Fortune, 6 September 200

Gian-Luigi Longinotti-Buitoni, president and CEO Ferrari North America, co-authored the book SellinDreams (1999). A recent article from the Wall Streournal (11–13 July 2014) had the following headlin

‘LaFerrari Is a Million-Dollar Dream Car’. Selling dreais indeed the core mission of the luxury sector and ibrands.

The luxury industry has become a business of brandCustomers visit brands’ websites and agship stores. Thclick on and search for ‘Prada’ or ‘Bottega Veneta’, no‘leather bag’. The luxury market entails more than simpselling excellent products in excellent places with excellservice; it is the brand itself that activates and embodithe intangible element of the dream, the symbolic accessa specic universe of privilege and a measure of socstratication. Royal Salute is not simply a rare whisky thahas been aged for a minimum of 21 years, unspoilewaiting for maturity; it represents access to a highsymbolic moment and universe, the coronation day o



Queen Elizabeth II, heir of a legendary dynasty. On 2 Jun1953, 21 gunshots were red by the Royal Navy and, othat day, this rare whisky was offered as a tribute to thenew queen. By extension, the Royal Salute brand is tribute to the new kings and queens of the modern daynamely, the successful entrepreneurs – particularly thofrom Asia – who have built new empires, companies anbrands all over the world. Being a consumer of RoySalute, then, is like being a member of an exclusive club.short, the consumption of luxury products fulls dream

and acts as a social stratier. This dimension of dreamfullment – that is, symbolic access to excellence and toprivileged life as a result of one’s efforts and choices –what separates luxury from premium.

There are many premium brands of cars, all of whicclaim to be the ‘best car’. The essence of premium branpositioning is the ability to claim being the number-onbrand in a given category and to furnish various offerinof proof to sustain this assertion. Premium brands need tjustify their pretension of being best in class. For exampLancôme advertisements often offer claims that a produis the best skincare cream because it has a unique featuor ingredient or creates a unique result that thcompetition cannot emulate. But luxury is not simply matter of being best in class; it embodies class itself. This why luxury brands seem able to command any pricPremium brands cannot do this; their price level ultimately capped by the mere rationality of their proofPremium cars sell ‘progress’ and, therefore, obsolescenc



one version of progress will ultimately be replaced banother. Dreams, however, last a very long time.

A striking feature of the luxury industry is its constagrowth despite economic crises, downturns, revolutionand wars. Bain & Company estimates that the luxurbusiness represented €800 billion in 2013, with €31billion spent on cars, €138 billion spent on hotels an€217 billion spent on personal luxury items (such aleather goods, clothing, watches, jewellery and fragranceBy contrast, these personal luxury items represented on

€80 billion in 1995.The source of this signicant growth in the luxursector is the world’s economic growth itself. BernsteResearch has demonstrated that luxury growth in country is closely correlated to its gross domestic produ(GDP) growth. This is to be expected because growcomes from companies creating value and distributinwages, and top managers enjoy harvesting the fruits their efforts. Gone is the image of stingy or meamillionaires, who save money all their lives but nevreally enjoy their fortunes. This old type of ‘rich’, aptdescribed in the book The Millionaire Next Door (Stanleand Danko [1998] 2008) no longer represents the reality oconsumption among the new rich, especially those froemerging countries, with China being a prominenexample. In China, chief executive ofcers (CEOs) ayounger, and there are numerous millionaires under thage of 40. They want to live as their Western counterpartdo and enjoy similar expressions of wealth and happines



such as the consumption of luxury products and brandsThe luxury sector has also thrived among the upper middclass in China, who want to emulate the lifestyles of thecountry’s rich and famous as well as celebrities in thWest. A symbolic part of such behaviour – and one thacan be easily imitated – is the consumption of luxubrands. When luxury brands began being distributed iemerging countries, the luxury industry took off. In Chinit is said that the luxury market started when Plaza 66China’s rst luxury shopping mall, opened on Nanjin

Road in Shanghai. The dream became visible and accessibfor all those ready and willing to pay the price.With growth from €80 billion in 1995 to €217 billio

in 2013 the personal luxury market is clearly no longer thprivilege of just a few. The Webster’s Dictionary denitiof luxury in 1828/1913 provides an interesting reminder how the concept has changed: ‘anything which pleases tsenses … and is also costly, or difcult to obtain; aexpensive rarity’ (see http://www.webstedictionary.org/definition/luxury). Granted, only 6,92Ferraris were sold in 2013 and 3,630 Rolls-Royces, but thAudi brand ‘[pulled] ahead of BMW worldwide to grab thlead in luxury car sales with 1.6 million cars sol(Independent Ireland Journal, 16 March 2014). Sucstatistics offer further proof that the luxury industry is nlonger made up of small niche companies as it used to bIt represents a real macroeconomic sector, aiming at binumbers and under the direction of managers.

Unlike other economic sectors, however, growth create

http://www.webster-dictionary.org/definition/luxury



problems for the luxury market because the luxury dreamis partly based on the notion of rarity and of access to privileged life, to products of exception and to a life exception. These beliefs are at the core of what the luxurconcept evokes among luxury consumers today. In one oour latest studies, 3,085 afuent consumers from six majocountries (the United States, China, Japan, BraziGermany and France) were interviewed. Respondents weselected on the basis of their declared purchases of certaproducts above a given price and were asked to select th

attributes that most dened their vision of ‘luxury’ from list of 10 attributes. Table 1.1 shows both the convergencof clients’ denitions of what the luxury concept evokand also some notable idiosyncratic differences betwecountries.

There is a striking similarity between these ndings anthe old Webster’s Dictionary denition, which emphasizpleasure and costliness. Only the Chinese respondenexplicitly reported that luxury evokes both the verexpensive and exclusivity for a privileged minority consumers so as to make these consumers stand out frothe crowd. Among other nationalities, notions of raritand being exclusive to a minority of the privileged few apresent but not among the top four associations; insteadthey are perceived as consequences or correlates of the hiquality, high prestige and high cost of the luxury goodand brands.

TABLE 1 . 1 Meaning evoked by the word ‘luxury’ for



consumers in six countries (n = 3,085)

FranceUnitedStates China Brazil Germany Japan

1 highquality

highquality

expensive highquality

highquality

highquality

2 prestige expensive highquality

pleasure expensive prestig

3 expensive prestige fashion dream fashion expens

4 pleasure pleasure minority expensive dream intemp

The more the luxury sector grows – as it has been doinfor nearly 20 years – the more this threatens the levers the luxury dream and the essence of what luxury evok(Thomas, 2008). Growth of sales means growth ocustomers, as is evident from the long lines of Chineclients waiting to enter the Louis Vuitton store on thChamps-Élysées in Paris or the Gucci store in London order to buy expensive handbags for themselves and thefriends. Ferdinand Porsche, son of the founder of Porschand designer of the iconic 911, once said that he did nolike it when he saw two Porsches on the same stre(visiting London today would give him a heart attackThus, a primary consideration for all general managers oluxury brands is how to reconcile growth and luxury. Howcan such a company grow while remaining true to thmodel of scarcity of supply that prevents growth? Can manager adhere to the tenets of a true ‘luxury strategy’ anyet still grow?



The Luxury Strategy (Kapferer and Bastien, 201reminds us that if luxury as a concept is subjective, and the luxury sector is elastic in terms of the brands ancompanies that should be included, the luxury strategy nevertheless a very precise notion and a demandinstrategy – it is a unique mode of conducting brands ancompanies. The luxury strategy entails a certain obligatioto break the rules of marketing in order to build luxurbrands. We identied 24 ‘anti-laws’ of marketing thashould be followed to create a successful luxury bran

They have been developed and implemented by the mosuccessful luxury brands over time. These anti-laws habecome references among luxury companies and groups.

The present book is not intended to be a substitute foThe Luxury Strategy. Rather, it focuses on the maichallenge of the luxury industry and brands today namely, the challenge of growth.

The future(s) of luxury

What is the future of luxury? This question is repeatedraised in publications and international conferences oluxury. This future is partly known – not as a result oguessing but rather as a consequence of empirical sociological laws. In addition, will there be one singfuture?

In the past, predictions about the future of luxury werbased on intuition or some sort of sixth sense: this attitud



is naive because it ignores the fact that luxury is not othere, waiting to be discovered in its new forms. Actuallluxury is a product of its time, epoch and the dynamics oclass in specic countries: luxury fulls social aneconomic goals and is more than a status or conspicuouconsumption game. Luxury in the 17th century served thsplendour of the Sun King, as luxury at the end of the 19tcentury served the splendour of the Rockefellers, thVanderbilts and the Carnegies. Post-modern luxury is euphoric hymn to the media power of the ‘people’; that i

the celebrities. Today, luxury is more than amacroeconomic sector; it is at the centre of society, held its most elaborate form of cultural production. Thiomnipresence of luxury in modern societies cannot bseparated from the hyperindustrialization of the worldwhich leads to the saturation of consumption. Saturatiocan be overcome in two ways, as exemplied by Uniqand Louis Vuitton. Uniqlo proposes quality and style foall through a low-cost business model. In contrast, LouVuitton adopts a value strategy that encourages everyonto buy fewer objects, but ones that last and are highlcultured. To secure its own growth, luxury must managits own image, the one that will legitimize it for years come. Furthermore, because this sector has become moconsolidated, in the hands of groups gone public (such LVMH, Richemont, Kering and Prada), the stock exchangwill play a role in the future of luxury. It has alreadcontributed to the naming of all these companies under thsame umbrella word ‘luxury’. Several years ago, ea



brand and each company was known by its own speciali(eg a saddler, a trunk maker, a shoemaker); now, they areall presented as ‘luxury brands’. Wall Street expectpermanent growth from LVMH, which differs from howluxury was conceived by family-owned companies. Thpreviously had no pressure to grow – they had time. Thfuture of luxury will also need to satisfy the stocexchange by taking into account the political, sociologicand ecological parameters of the epoch of today: is it timfor euphoria? Where? To celebrate what? Isn’t it time t

get back to the essence of luxury? The willingness of majluxury brands to be considered cultural productions is signal that, in some countries, conspicuous waste is a deaend street for the luxury industry: it now needs to promotconspicuous taste (Shipman, 2004) as a signal oconsumers’ cultural ability to select green conspicuousne

Where is the future of luxury? After the BRIC countricome the MINT countries. Because luxury sector growth directly correlated with GDP growth, the future of thsector likely resides in China, where there is a vauntapped reservoir of potential new clients. Africa alsshows great promise as a new market for luxury itemMany indicators suggest that this process is already undway in African countries with rare resources that arfuelling economic growth, such as Nigeria, MozambiquMorocco and Angola. Brazil may also emerge as a primluxury market, but this will not likely happen for a whiyet. The wealth from Brazil has already settled in Miamwhere the rich go shopping for luxury brands.



Luxury consumption is also deeply linked turbanization, a movement that is luring people away fromtheir original homes, villages, parents and clans. Whethey arrive in cities to nd jobs, these people enter into competition of sorts – and must build a new identityLuxury brands represent an easy way to build such socialdesirable identities. This can also be acquired at low codue to counterfeit products whose logos are prominent. Iemerging countries, such counterfeit brands paradoxicalact as entry range of the well-known institutional brand

Research on counterfeit brands has explored the notiothat such products might not be as detrimental to thbrands as once thought; indeed, some argue that they evecontribute to the diffusion of their fame (Nia anZaichkowsky, 2000). Now, because brands are often madeby their clients, the multiplication of these unexpecteclients may be a mixed blessing from that standpoint. Fexample, Burberry experienced this when the brand wchosen by the ‘chav’ subculture (lower class, brash anoften loutish) in Britain.

With regard to China, it is likely that the local HNWI(high-net-worth individuals, or millionaires in cash) asensitive to the fact that they belong to a minorityThrough their success, they have distinguished themselvand they want recognition for this. For them, the diffusioof a brand is not positive. For the mass of middle-claconsumers, however, it is reassuring to buy the same LouVuitton bag as everyone else; it is a way to be certain one’s choice and to become symbolically integrated into



‘upper class’ by wearing this brand logo, which has todbecome the proud symbol of China’s economic take-o(Rambourg, 2014).

Another forecast can be made about the future oluxury in emerging countries: after the discovery phase luxury items is over, these consumers will begin to seout experiential luxury. However, this will take time. Inthese countries, buyers still mentally live in a world material shortage: they were poor only decades previouslor at least their parents were. As Chadha and Husband

(2006) show, new luxury buyers emerging from a state opoverty and hardship enjoy spending time visiting luxustores, where people address you with respect, extend Vtreatment, and purport to care about you as a personrather than just a number. In addition, these stores are likthose made famous in New York or Milan, whichenhances the magic of the place and offers the ability ‘travel without travelling’. In this luxury discovery phashappiness is measured by the number of Louis Vuittobags that one buys. Only later will the realization comthat possessions do not equate to happiness. Such mindset is more characteristic of mature countries, which there is a society of material abundance but shortage of happiness. Under such circumstances, so-callexperiential luxury needs begin to emerge – that is, thopportunity to engage in unique, rare, emotional anmeaningful experiences anywhere in the world. This is wso many new luxury resorts comply fully with the demanof sustainable development: through such efforts, the



high prices offer a more meaningful experience.In mature countries, as Jean Baudrillard (1998

predicted, elite consumers are competing on both wealand taste. They move from a compulsive and contagiouappropriation of objects to the demonstration oappreciation of these objects. This is why luxuries anluxury brands exist. As soon as a brand becomes preferreby the new rich, the old rich move to another, less visiblless coded brand, one with subtle indications orecognition that signal the owner’s ability to ‘understand

and be ‘part of it’. Baudrillard also notes that the productsignalling wealth, taste and social group are continuouschanging. As these products become embraced anconsumed as luxury symbols by the upper middle class,is likely that they will no longer be held as such by thrich. Celebrities (eg new actors, new sports gures, nepop stars) are often characterized as the new rich: they ahigh in their need for status and buy brands they believe be status symbols. However, the rich have less need fosuch displays of status (Han, Nunes and Drèze, 2010); theprefer bespoke, experiential luxury (such as a visit to aiconic château of the Bordeaux wines, having dinner withe owner and attending the harvest). They may alsexpress their status through the acquisition ocontemporary art (which, as a result, has become speculative venture) or real estate and by adopting thlatest sustainable and digital technologies for their homecars and boats.

Who will make the future of luxury brands? To date



large institutional brands have been good at identifyinrising designer stars and often prompt them to manage ainstitution (eg Marc Jacobs, John Galliano). Through thipractice, the large companies bring fresh perspectives old brands, prevent decay and essentially avoid the entry new competitors (if the designer had launched his or hown brand and devoted all his or her energy to it).

However, as is the case in any sector, competition oftecomes from where it is least expected. New technologyone avenue. The innovation of dosettes has create

Nespresso, the ultimate experience in coffee, which hfully adopted a luxury strategy. Apple is another companthat has pursued a luxury strategy (in contrast withSamsung, which has followed more of a premium branstrategy). Hybrid engines have allowed the newcomLexus to become the industry standard for clean luxurcars, and lithium batteries have made Tesla the ‘it car’ oall Hollywood celebrities, cautious to be no longer seedriving Ferraris or Lamborghinis (icons of yesterdaydream). Celebrities are in the business of self-branding maximize their sustained relevance and financial value.

Emerging countries are likely to produce the futuluxury brands for the world. This is why Hermès waclever enough to buy majority shares in Shang Xia (ChinChina has the potential to produce such brands: it has long history, a tradition of excellence in craftsmanship anart, new designers who are able and willing to succeeand the support of the state. The only thing missing is thbelief that they can succeed. Innovativeness and creativ



are essential to the development of luxury brands, yet thequalities are not facets historically embraced by the Asiculture, at least not yet. Finally, luxury entails more thajust products; it is the culture of excellence all along tvalue chain, including all the subcontractorsUnfortunately, in China, in the wake of the culturarevolution, a lot of know-how has been destroyed, anmany master craftspeople have disappeared. It will taktime to rebuild these skills. The same holds true in Fran– a lot of precious knowledge essential for haute couture

no longer taught because there is a lack of both teacheand students. This is why Chanel decided to buy severniche companies that possess this idiosyncratic knowled– when they were at risk of going bankrupt. Without thivaluable know-how, where can the luxury dream goEverything must be made in such a way as to prevent threlocation of production sites to foreign countries (see alChapter 5).

Finally, for some specic targets, will tomorrow’luxury brands be non-material? What will be rartomorrow? Silence, air, harmony, peace … these are publigoods and are difcult to privatize, but some places in thworld might be uniquely endowed with such rarities.

We now turn to a panorama of major challenges thapotentially threaten the luxury dream, in both the presenand the future. In one sense, these challenges are the resuof the luxury industry’s incredible growth worldwidHowever, they also result from deep changes in thenvironment: technological (the internet), socio-econom



political, ecological and so forth. Each of these issues covered in greater detail elsewhere in the book.

The rise of fashion: from dream tocontagion of desires

Do the Chinese tourists who patiently line up outside thGucci agship store in London know why they do this? Odo they simply imitate the behaviour of others like themThis is indeed more fashion than luxury. What sellfashion? Being fashionable – a very transient and fragstate that needs to be continuously revisited anreimagined. Luxury, however, is about long-term valueBeing a fashionable item is excellent for sales in the shterm, but this also moves the brand away from a luxur

positioning and towards more of a fashion strategy. Iemerging countries and among new consumers, there isquid pro quo, a misunderstanding: in China, for exampleluxury is now bought in order to be fashionable. Table 1.illustrates this phenomenon: Chinese respondents deneluxury as expensive, high quality, fashion and only for minority. As the anthropologist René Girard (2005) hademonstrated, the fashion desire rests on a mechanism hcalls the ‘triangulation of desire’. Consumers do not desithe product or brand per se, but rather the desire oanother person. It is similar to a child who wants a tojust because another child has or wants the toy. However



once bought or possessed, that toy loses its value. Thnotion of luxury is tied to the selling of dreams, not wanor desires. It takes time to build an exceptional product (ea Patek Philippe watch) and there is no rush to buy it. Thdreams that a luxury brand embodies are ideals that mighcome true. One dreams of buying a Porsche 911 Carreratime will tell if and when this purchase will ever realized. The completion of these dreams depends on manfactors, but the dreams alone are pleasant to covet. Thegive rise to goals. Desire is consumption – that i

consummation (fire) – leading to endless replacement.Because the new rich in emerging countries often comfrom poor backgrounds, they do not yet have the samadvanced cultural sensibilities as the ‘old rich’ (no one htaught them what good champagne is, for example). Themake many of their decisions on the basis of price anpopularity, on what is fashionable today. The enactmentand consumption of luxury in mature countries are verdifferent. As Patrick Thomas, former CEO of Hermèbluntly used to say: ‘When a product sells too much, wdiscontinue it immediately.’ His reasoning is simple: aftefashion comes out of fashion. Luxury does not aim tbecome a bestseller but rather a long seller. Certainly LouVuitton hired Marc Jacobs for the launch of a ready-towear line and its défilés, but the business model of LouVuitton has not changed. It is a paragon of the luxurystrategy.

One of our recent studies validates this manageriintuition. We measured consumers’ perceptions of 6



luxury brands (belonging to Comité Colbert, FondazionAltagamma and similar professional syndicates in thUnited States, Germany and the United Kingdom) on sstructural variables: brand dream potential, brand luxurybrand tradition, brand fashionability, brand prior purchaseand brand awareness. Respondents were luxury buyers iChina, the United States, Brazil, Japan, France anGermany (n = 3,085). Pooling all the results for the 6brands, we were able to map the relative position of thesix structural variables. This map appears in Figure 1.1.

interpreting this gure, note that when two variables arclose to each other on the map, they are correlated anthus work together. The dream value of a brand isnurtured by its perceived luxuriousness and its traditionlegend and historical heritage. Luxury represents the futuof tradition. As the mapping in Figure 1.1 reveals, thdream value is also nurtured by the number of people whhave heard of the brand (awareness) yet do not purchase iNotably, fashion goes in the opposite direction, meaninthat it does not create value with regard to luxury-relatedreams. Fashion and luxury are opposing concepts. It mabe fashionable to wear luxury brands, but if a luxurcompany starts behaving as a fashion house, unless there a purposeful desire to leave the luxury sector and enter thfashion sector this move will be a source of value loss.

FIGURE 1 . 1 Luxury and fashion are opposite concepts(pooled data from China, the United States, Brazil, Japan,France and Germany)



SOURCE Kapferer, Valette-Florence, 2014a

The business model of fashion is based on the necessof making as much money as possible at the start of thseason before the item goes out of fashion. As a result, increase the gross margins, everything that costs too muc



is not used – gone are rened works, rare fabrics aningredients; gone is the importance of complexity and hiquality; and gone is the motivation to make something bhand. Value is based purely on style, design, logo, glamouand marketing. In addition, relocation of production tolow-wage countries is the norm because this maximizgross margins by reducing the costs of manufacturing anquality controls.

The luxury industry must be cautious not to fall prey tthe confusion of luxury and fashion. The growth o

demand for luxury items in China is based on two levethat will not last forever: the rst one – luxury gifts – halready been halted by state authorities as they havworked to put an end to corruption (luxury items wervery practical and common gifts and tools of bribery). Thsecond lever is that Chinese consumers today do ndifferentiate between fashion and luxury: they conate thtwo concepts. However, if luxury adopts a fashionbusiness model, it will lose its long-lasting, dream-bassource value.

There is another consequence of this misunderstandinand conation of the luxurious and the fashionable, whichas fuelled luxury growth in China and other fast-growineconomies – namely, the lack of loyalty to brands. Fashiois whimsical. In addition, new Chinese consumers aindiscriminate buyers. How can Chinese consumers adheto Gucci values when they just do not know them? Thsame goes for Chanel or any other foreign brand. It taketime to learn what lies beneath a brand. Fashion can be a



simple as just knowing which celebrity wears what branHowever, luxury does not usually need celebritendorsement; indeed, it is one of the major ‘anti-laws’ marketing (Kapferer and Bastien, 2012: 77). Maturcountries have had at least a century (sometimes more) learn the values of luxury houses. How can new consumefrom the high-growth countries be endowed with thinnate knowledge? Brands will have to educate thethrough exhibitions, creation and diffusion of brancontent on the web, direct contacts and so forth. But, i

the short term, a key business question remains: How caa luxury brand keep its clients (and employees)?A consequence of this lack of loyalty is the systema

brand extension of luxury brands today: once-specializbrands are now a thing of the past. Berluti used to be thmale luxury shoe brand, a source of the male dream. In aeffort to entice clients to come back to the stores and tbuy online, the company hired the designer from Zegna compete against Zegna by designing men’s suits, shirts another garments. Gone are the times when a brand grewand had a singular speciality that made it an icon. Tojustify the high rent of locating stores on popular shoppinstreets in wealthy urban areas, it has become customarfor brands to extend their range and lose what made themspecic and special. Luxury brands are fast becoming seall brands.

Facing high demand and abandoning



rarity

Historically, luxury was made for the few: it was thordinary life of extraordinary people. In today’s consumelandscape, luxury faces a tsunami of demand. Asian-basetravel is mostly luxury-purchase tourism. At Jeju IslanKorea, Chinese tourists do not even need a visa (wherethey need one when they go to Seoul, the capital city). JeIsland is a massive tax-free island where everything geared towards buying luxury goods. Also one is sure ththey are authentic. However, Paris is the most exclusivdestination for buying luxury brands – the silk road ireverse. There is undoubtedly a sense of pilgrimage –religious dimension, if you like – in tourist visits to ttemples of consumption and the agship stores of luxurbrands.

Put simply, the luxury industry was not prepared tomeet this kind of demand. And indeed, some even asshould they meet it? This sudden demand has put a lot ostrain on many facets of luxury companies. For example:

• Production processes used to be time-consuming andpainstaking, and thus waiting lists due to bottleneckin production were common. Luxury brands areoften mythologized further with the ideology of slowproduction time and long waiting lists. But dreamscan wait, whereas desires require immediateconsumption.



• The supply chain for luxury goods has traditionallybeen neither fluid nor rationally managed (unlike fafashion, such as Zara, which has thrived on the basisof a revolution in the supply chains). This presents aproblem: when consumers and retailers demand toknow exactly what time a product will be ready andaccessible in stores, this creates impatience and oftea lack of understanding when there are no definitiveanswers to such questions.

• Finally, the luxury retail experience is supposed to ba delight – justifying in itself the visit to the stores.As such, this is a major reason that luxury brandsneed stores. Given some of the aforementioned issuthat luxury brands face, it is fair to ask what kind ofdelight Chinese consumers experience, for example,when they have limited time to make several

purchases in a luxury store. Will these purchases bethe prized souvenirs of a lifetime, or will theseconsumers leave with the feeling of having beenprocessed quickly and efficiently and shown thedoor? Luxury brands are not to blame for thisconundrum. It is very difficult to serve 60 clientsentering a store with lists of products to buy beforethe bus leaves at a fixed time. To solve this problemshould these retailers create special counters just forChinese consumers, without hurting the sensitivityand sensibilities of these welcome customers? Woulthey feel discriminated against? At the very least,



these retailers should have Chinese-speaking staff ohand. But should they then also have Japanese-speaking and Russian-speaking employees? The taskis tricky for this industry when faced with bignumbers of clients to address in a limited amount oftime.

High demand means higher volume. How can a companbuild a dream and abandon rarity? Some luxury brandwill decide not to do so: they will aim to please only a feTheir business model will remain one of limited supply (Romanée Conti wine, Krug Champagne, FerrarLamborghini). These brands raise their prices or semostly bespoke products and restrict their sales (Ferrareduced the volume of cars sold in 2013 in order trekindle its image of exclusivity). However, the growth the luxury sector – long-awaited by the stock exchangventure capitalists and investment funds – is not based othese niche brands but rather on brands that have adoptethe ‘abundant rarity model’ (see Chapter 2). Indeed, it interesting to observe in Table 1.1 that rarity per se is noin the top four list of attributes that dene luxuryworldwide. Yet the data in Table 1.1 come from luxur

buyers themselves – the afuent – selected by thepurchases of products beyond a certain retail price. Thestill view brands such as Louis Vuitton as luxury anperceive them as being able to nourish their dreams, thuindicating that scarcity alone is not the primary lever this dream, but rather a combination of feelings of rarity



privilege and luxury. The mental processes behind thesfeelings are analysed later in this chapter.

TABLE 1. 2 Percentage of luxury buyers who view Louis

Vuitton as luxury and dream Dream Luxury

France 27% 60%

United States 22.5% 62%

China 23.4% 59.4%

Brazil 16% 60.6%

Germany 26.1% 58.7%

Japan 33.9% 56.9%

SOURCE Kapferer, Valette-Florence, 2014a

Notably, the perception of Louis Vuitton as a luxurybrand is very high and homogeneous across both maturcountries and emerging ones (see Table 1.2). Two-thirds othe respondents consider Louis Vuitton a luxury brandespite its wide success, which makes this brand everythibut a niche brand today. As to the dream potential of the

brand, it is lower yet still homogeneous, reaching ihighest levels in Japan and lowest in Brazil, where tbrand has not yet developed its business and distributioInterbrand (a global design agency) rates Louis Vuitton the world’s most valuable luxury brand, ranking it 17thamong all global brands from all economic sectors, wi



an estimated brand equity of US 24.9 billion. This valuor brand equity, indicates that the brand will be able toexert signicant pricing power on a large volume oproducts over a long period of time, with regular growtacross countries. In addition, due to conformitycontagion, or merely the dream potential of the brand, itstores rarely lack clients. Louis Vuitton demonstrates thapowerful brands are not contradictory with the concept oluxury as long as they respect the luxury strategyConversely, the handbag brand Coach follows a mas

prestige strategy, with lower-priced products manufacturein low-wage countries: it is the most-searched luxuhandbag brand on the internet, but is far behind LouiVuitton and is only valued at US$14.6 billion.

Figure 1.2 summarizes how luxury brands create higvalue through specic levers and how these levers work combination to build the overall luxury desirability todayThis model emerges from a statistical partial least squar(PLS) analysis of perceptual measures of more than international and local luxury brands, offering a widvariety of situations, price levels and so forth (Kapferand Valette-Florence, 2014a). Some of these brands may bcriticized by industry experts as ‘not being luxury’ becauof their size or accessible price or because they are nselective enough in their distribution, but the datdemonstrate that despite these judgements (which are oftdefensive in nature) many of these brands maintain a higlevel of perceived luxuriousness and dreamability amoafuent clients. The levers in the upper half of Figure 1



refer to the selectivity of everything the brand does: it htangible elements of rarity (not to be confused with mescarcity of supply) such as know-how, heritage, selectivdistribution, targeting and availability – everythinindicates that the brand does not target all consumerequally. The levers in the bottom half refer to thconstruction of dreamability through the communicatioof prestige and glamour and through highly symbolic anhigh-priced products. The bottom half pertains to buildinthe power of the brand itself (awareness, attractivenes

momentum). Today, luxury is a business of brands. Peoplenter a Hermès store or a Prada store. Beyond selectioone must build the seduction of the name itself.

FIGURE 1 . 2 How different facets combine to build theperception of luxury



Figure 1.2 is useful to identify what makes peopconsider a brand a luxury brand, although luxury expertmight disagree and even though a brand might not bfollowing a luxury strategy. For example, Ralph Laurehas not adopted a luxury strategy but rather a masstigbusiness model, with factory outlets representing a largshare of its sales, the relocation of production to low-wag



countries, a high rate of promotional sales and so on. YeRalph Lauren is nonetheless perceived as a luxury brand b50 per cent of a French sample of afuent buyers, 47 pcent of a US sample, 48 per cent of a Chinese sample, per cent of a German sample and 32 per cent of a Japanessample. Comparing the perceptions of respondents whdeemed Ralph Lauren to be a luxury brand with those whdid not, this reveals that the main lever is ‘this brand has very selective distribution’; this item carried the moweight in determining luxury impression formation for th

brand, along with the halo of ‘class and distinction’ anthe ‘glamorous image’ it has created. The strength of theperceptions offsets the potentially negative effects of tpromotional sales, the factory outlets and the quality othe Polo Ralph Lauren line (the company’s main line). YRalph Lauren’s agship stores (outside the United Stateare the brand’s primary communication investment: theare designed to load the visitor with sensuous impressioand experiences of prestige and tradition (even though thbrand has been recently invented from scratch). (For modetails on the business model of Ralph Lauren, see Chapt9.)

Because of the remarkable growth of Louis Vuittonmany experts assert that it cannot any longer be classieas a luxury brand. However, this vision is limited becausit connes the concept of luxury to niche brands aimed athe select few – that is, ‘condential’ brands that are higin product luxuriousness but not in dreamability, at leasbased on name. Wall Street and Interbrand do not adhere



to this restricted vision. They estimate that Louis Vuittois indeed the most powerful luxury brand in the world (terms of nancial value). In our recent research, 60 pecent of the afuent people interviewed also perceived LouVuitton as a typical luxury brand. In mature countries, foexample, those who acknowledge Louis Vuitton as luxury brand perceive this brand to be higher on thfollowing four dimensions than those who do not gransuch status to the brand:

• ‘The brand is still actual and remains very unique.’• ‘It endows with class and status.’• ‘The products are very superior.’• ‘It is not for everybody.’

Notably, when the same type of analysis is done t

distinguish the levers of Louis Vuitton’s dream potential, similar list of levers results, with a few signicadifferences:

• The first lever that distinguishes Louis Vuitton as a‘dream brand’ for the same affluent sample from amature country is that ‘it looksinaccessible/expensively priced’.

• Second, ‘it endows with class and status’.• Third, ‘the products are very superior’.• Fourth, ‘it has a halo of glamour’.• Finally, ‘it looks fashionable’.



This nal lever echoes the hiring of Marc Jacobs in 199(he left in 2013) to take the artistic direction of the leathebrand, introduce ready-to-wear lines, and create buzamong the artist community (see also Chapter 3). Thstrategic hiring choice has achieved its goal of boosting tdream value of the Louis Vuitton brand, but it had noeffect on its perception as a luxury brand. This is nosurprising, given the aforementioned notion that fashioand luxury are contrary concepts as business models analso in affluent consumers’ perceptions (see Figure 1.1).

How will China influence the dream?

According to Bain & Company’s latest estimates, luxursales in mainland China rank fourth worldwide, just ifront of France, at least in terms of personal luxury good(such as watches, fragrance, leather, jewels and ready-towear). However, Chinese tourists now also buy all arounthe world where prices are lower than they are in mainlanChina and the quality is guaranteed, not to mention thpleasure of purchasing in the home country of theprestigious brands (Rambourg, 2014). Bain & Companestimates that Chinese consumers represent 29 per cent all luxury sales worldwide (in value) for personal luxugoods. Certainly, the present laws against corruption havcreated a downturn in the luxury market in China in 201and 2014, revealing that part of the market growth wabased on this unlawful practice. Nonetheless, the size



China alone and its future economic growth reinforce thnotion that it will someday be the foremost luxury markein the world. Today, nearly one in every three clients oWestern luxury brands is Chinese. For many brands, thweight of China goes beyond a mere boost in sales. Whenparticular segment represents, for example, 40 per cent oa brand’s sales, this cannot help but affect the brand, itmanagement, its products, its production, its philosophand so forth. On a more general level, China transformeBuddhism and later communism – it will likely transfor

luxury as well (Beraha, 2012).In the non-luxury market, some brands have alreadmoved their headquarters to Asia. Schneider Electric now based in Hong Kong. Zegna is still an Italian brandbut it has strongly pushed its distribution in China annow has production facilities there as well. Prada hadeclared that it is producing products in China. Thimovement is likely to go even further for brands that awilling to abandon the key commandment of the luxurstrategy: not to relocate production (see Chapter 5), unleof course the motivation is to benet from local, uniquknow-how or to circumvent exorbitant custom dutieThus, Audi, which is produced in China as part of the VWgroup, has a competitive edge in China for that verreason. Interestingly, the top male model on the froncover of the Emporio Armani spring/summer 201catalogue is Asian.

The main question about the seeming sinisation oluxury is: Does it create value for the Chinese consume



Certainly, being close to customers is always a benecimove for a brand. However, the Chinese falling in lovwith Western luxury brands has helped Chinese consumeto become better integrated at the global level. They canow buy the same outts and brands associated witWestern celebrities. As such, Western symbols of luxurhave been a useful marker of the end of China’s seclusioand the beginning of its remarkable economic growtLouis Vuitton has been lucky enough to be used as the vevisible ag of this collective success. This is why everyo

in China wants to own some product by this brand: iechoes the nation’s pride (Becker, 2014).However, recall that Burberry almost collapsed 1

years ago after becoming too dependent on Japan, to thpoint of having abandoned style to the local licensewhich had transformed the revered checkered brand into female-oriented one. Rosemary Bravo’s audacious strateto turn the brand around was to rebalance the brand andaim it at the US market, still at this time the world’foremost luxury market. The number of Chinese touristtravelling abroad is estimated to rise to 100 million b2020. Why would they visit European stores of brands thawere mainly being made in China?

No one knows exactly the future of China. Recentlythe statistic came out that 1 per cent of the Chinespopulation owned 30 per cent of the nation’s wealth. Howlong will Chinese authorities allow this inequality to stanin a country in which socialism and communism are stthe basis of the political ideology and governance? Weste



luxury brands are the visible face of this overt and growininequality. As such, these brands may serve as scapegoatIt is also well known that the present interest of China iWestern high-end brands in any sector – aviationautomobile, pharmaceuticals and so on – is based on thdesire to acquire high technology and ‘premiumize’ theown production. Taking a long-term view, China will neeto become independent and may ultimately want tabandon these brands altogether.

The challenges of the internet

In Far-Eastern Asia, internet challenges to luxury brandare very visible. The data are well known now: in thregion, consumers are some of the most ‘connected’ in tworld. They have grasped and utilized digital technologito enhance their lifestyle and add to the uidity of thelife. In China, the single-child policy has created a vehigh affiliation need, thus paving the way for the success Weibo, WeChat, Qzone and other social networks. Theseare urban societies in which consumption is the primamode of self-realization, with visits to retailers beingmajor source of entertainment. Living in town, working town and engaging in leisure activities in town, the mobiphone is the hub of one’s life, and people remain connectearound the clock.

However, luxury brands have not yet fully embracethe internet. Some call it conservatism, others



generational gap. But there is more to it than that: in thworld of luxury brands, there must be strategic prudencand long-term vision. In this sector, time is long, unlikmost other sectors. The same brands are regularlpresented as models of the digital avant-garde by moconsulting companies (eg Burberry, Net-a-Porter). Yet thebusiness models are closer to fashion than to a luxurstrategy.

Books have been devoted to the many facets of threlationship between luxury and the internet (Okonkwo

2010; Kapferer and Bastien, 2012). In this chapter, wsummarize the essence of the challenges and opportunitithat the internet represents. We devote a specic chapter ithis book (Chapter 6) to possibly the most important issuthat luxury brands face – namely, how to transform theinternet to adapt it to the needs of the luxury sector and itlong-term growth. One issue is certain: the internet has nobeen built for luxury brands; it is a medium for masactions. In the digital revolution, everything is big: bdata, large numbers of fans on Facebook, most-searcheproducts on the internet, most-viewed pieces of brancontent on YouTube, highest numbers of visitors and son. This strategy and goal are the opposite of luxury anof its source of value.The internet offers a wealth of opportunities for luxurbrands, especially the young ones. A key fact thadifferentiates luxury from other economic sectors is thnotion that more purchases dilute the luxury dreamwhereas for brands in the fast-moving consumer goo



category, more purchases increase brand loyalty. There is point at which consumers realize they are not any happiwhen they buy their fourth or fth Louis Vuitton bagwhereas eating more Nutella spread increases peopleloyalty behaviourally and affectively. This detrimenteffect of luxury purchases is called the ‘dream equation’.was statistically demonstrated nearly 20 years ago (Duboand Paternault, 1995) and has been revisited recentl(Kapferer and Valette Florence, 2014b). Indeed, drawinon a statistical analysis of 60 brands, we nd that th

dream potential of luxury brands is boosted by their levof brand awareness and by the public perception that theexpress a heritage, legend or history. However, this dreamis diluted by the degree of brand penetration (thpercentage of people who have bought one product fromthis brand).

The key lesson of the ‘dream equation’ is that luxurbrands must be sensitive to the difference between thelevel of awareness and their penetration. In this differenlies the dream: known by all, bought by few. Of course, a brand is too unknown, it cannot act as a social stratieand a source of personal pride. This is where the internecan be useful: it can boost brand awareness withouincreasing brand penetration. The brand-building potentiaof the internet, along with the necessary and experientibrick-and-mortar store, is a key asset for luxury brandsAlthough everyone insists on the internet being a source direct sales (the e-store), we argue that the internet’s mause for luxury brands is that of communication. Th



internet inuences purchases because people search fadvice and information rst and foremost on the interneand social networks, or maybe want to know if there arspecial events in some department store the day they avisiting a particular city. The internet’s ability to conveimages is a great lever for this dream industry becaudreams are made of images. This is why luxury brandhave essentially become media companies that edit acurate a high level of high-quality and creative ‘brancontent’ material. They talk about their uniqu

craftsmanship, their heritage, the life of the founder, newabout their latest creations and so forth. On the interneteverything can be public relations.

The internet is also a great way to increase the servilevel of luxury brands. Services are indeed one of the wespots of many luxury brands today (along with supplchain and staff of the right talent). Of course, services alimply hotlines, concierges and direct communication wiexperts (eg a platform that enables consumers to discuhow and when to use an expensive anti-ageing cream thjust bought). The internet can also inform customers abouwhich store carries a particular item, at least as far as thsupply chain information system can tell (few luxubrands actually have an efcient one). Finally, as itetymology reminds us, the internet is an inter-net – it isway for networks and communities to grow and interacThis is not to be confused with the number of fans that brand has on Facebook or its equivalents in China. Toomany people equate the concepts of ‘community’ an



‘social’: this is a mistake. Luxury brands are not aiming appeal to a mass of ‘likers’ but rather to build loyacommunities of connoisseurs and ramp them up thcommitment ladder by creating local selective events aphysical encounters.What about the challenges created by the internetFirst, remember that the luxury sector has thrived bturning marketing laws upside down. Although the luxursector recruits high-level managers from fast-moviconsumer goods to add a level of professionalism when

is lacking (eg supply chain management, global branmanagement, rationalization of the ranges, categormanagement), the survival of the luxury sector resides its differentiation from any other type of business. Thchallenge is even more difcult to achieve when copycbrands abound, which appear very similar to luxury brandin the eyes of novice or inexperienced consumers (Chap9 is devoted to exploring and explaining this confusion the marketplace). In addition, not all so-called luxurbrands actually follow the luxury strategy. Marketing haled brands such as Coach to call themselves ‘luxury’ their websites, yet Coach price their bags below US$1,00which is below the level of most real luxury brandSimilarly, L’Oréal Group positions Kiehl’s in their ‘luxurdivision’. The consequence is that benchmarking wiother industries to talk about the internet, for example, inot wholly informative for the way that luxury shoulbuild its own version of the internet, in order to keep itdifferentiation, its reason for being and pricing powe



Certainly, one of the highest levels of service today can experienced by visiting Amazon.com. This does not methat luxury can employ the ‘Add to Cart’ strategy tadhere to standards of digital excellence while sustainithe necessary gap with other industries, and mass-markones in particular.

An online presence is mandatory – no one questionthis any more – but digital existence needs a strategWhere should a brand go, and where should it not go? In sense, luxury is the art of absence: this is why (as Figu

1.2 shows) selective distribution plays such an importarole in the construction of luxury brands’ distinctivenesThe same should be true on the internet. Similarly, ecommerce should be handled with care: it helps to identisites where the goods are authentic, just as in brands’ owstores. However, brand building needs more than jussales; it needs to create a mythology and cult of followemuch like a religion (Dion and Arnould, 2011). Thireligion needs temples (agships) where the brand belieand faith can be grounded and the experience can bshared. This luxury experience is made of two pillars:

1 The multisensory physical atmosphere in the temp

(store): digital tools and environments can and dplay a role within the stores to create an enhanceexperience (with interactive mirrors or digitashowrooms, as in the case of Audi), thus enhancinthe modernity of the traditional brand.

2 The feeling of power, elevation, achievemen

http://amazon.com/



exclusivity and care when entering a boutique (beintreated as a VIP). As Liu, Burns and Hou (2013point out: ‘Chinese consumers have a feeling prestige because someone wants to cater to theneeds.’ They typically ‘feel more important walkininto and shopping in a luxury store’.

These two facets cannot be recreated on the tablet osmartphone screen; these media lack the multisensoexperience and, above all, a sacricial dimension. There

no religion (or cult of the brand) without some kind osacrice – thus, the importance of the high price poinwhereas most retailers compete on discounts. There is althe sacrice of one’s time (planning the visit, going to thstore, waiting). In stores, too, unlike on the internet, thconsumer can experience the brand rituals and servicsignatures.

There are other challenges created by the internet awell. We have discussed the underlying preoccupation othe internet of ‘big numbers’. Another major challenge that of burnout. The internet has created a sense oobligation to constantly feed the ‘buzz beast’. Howeveluxury exists in a world of slow time or even timelessne

The internet may lead brands to change this essence anbecome more hybrid, possibly sacricing their specicifor fashion or celebrity. The internet is also a massivmarketplace in which by a simple click one can jump froGucci to Gap, from Chanel to Michael Kors; this has thpotential to conate brands and confuse the shopper b



obscuring meaning and making all brands comparable anaccessible. In so doing, there is a real long-term danger creating banality and reducing brands to clicks, producand prices. Finally, the egalitarian underpinning of thinternet and social networks modies the nature of threlationship between brands and clients. Can a friend makyou dream?

Against the blurring of lines: recreate the

gap, transgress the codesLuxury is becoming one of the most overused words in tworld. The luxury dream has attracted many imitators thado not actually compete in the luxury segment but try tblur the lines and make the frontiers less clear. Luxur

designers themselves contribute to this confusion: KaLagerfeld, Stella McCartney and others have createspecic low-cost lines for H&M. This has certainlincreased their own fame, but it has also added to thgrowing confusion. In April 2014, the model GiseBündchen appeared in both a Chanel make-up advertisincampaign and an H&M campaign, shot in a similaparadisiacal location to those chosen by the mosprestigious and rich brands. The photographer is LachlaBailey, an Australian who has worked for Balmain anTheory.

This confusion is not new. Madonna did some



advertising for both Versace and Gap. Kate Moss also haaccepted work for all kinds of brands. Such examplereinforce anti-law number 16 in T h e Luxury Strategreliance on top models is a sign of weakness for the luxubrand (Kapferer and Bastien, 2012: 77). It is signicanthat the choice of Brad Pitt to promote world fragrancicon Chanel N°5 was made by the US headquarters aftacques Helleu, the chief artistic designer for Chanel, ha

died.The confusion is only growing, rst, because of th

increase in cost to work with top models, which ofteprecludes any form of exclusivity. In addition, fashiomass-merchants (eg H&M, Uniqlo) need to borrow thcommunication codes of luxury to lift their image whisticking to their low-cost business model of fast fashimanufactured in low-wage countries. Their stores alscontribute to the confusion: Zara stores do not look likdiscount stores and are situated on the same streets aluxury brands; Uniqlo is on Nanjing Road in Shanghai. Tmaintain differentiation with followers and imitatorthere is no solution other than to transgress thcommunication codes that others are imitating. This why most of the communications from luxury brands armade in-house and under the supervision of the chicreative designer.

In the luxury sector, the norm is not to hire anadvertising agency to create communications but rathindividuals and artists who will be fruitful for a short timand able to transgress the luxury codes (for the code



quickly become habit within luxury companies and asoon imitated by others) but will eventually be abandoneon the altar of singularity. This transgression is madpossible by the fact that luxury advertising does not aim sell. This is another major anti-law of luxury marketin(number 15; see Kapferer and Bastien, 2012: 76). In thluxury sector, even a poor campaign builds buzzreputation and brand awareness. Luxury advertisementmust appear off the beaten paths. Luxury brands fear thbig advertising agencies because they are too proces

oriented, making long briengs, formatted by Procter &Gamble. They are well adapted for mass-marketinbrands. In the luxury sector, however, the essential elemeis the quality of execution. Luxury brands typically recrusmall agencies that understand the luxury culture and thlevel of rigour along the whole process of productioThere is also less conict between the artistic director these agencies and the chief designer of the luxury brand.

Paradoxically, for the same motives – the gap is createby the quality of execution – the web agencies that ahired are rarely hot shops and newcomers. Indeed, luxurbrands need perfect technical execution, an advancetechnological presence and durability in the chosepartner. The web is another way of ‘performing’ retail. If company is using a particular technology that is a bit olit can negatively affect consumers’ experience and crediscontent, if not bad buzz. People not only expect perfeexecution from luxury brands but also divine surprises their web experience. This means that the chosen digit



partners should themselves be benchmarking their skiand products all around the world; they should be at thcutting edge of the avant-garde; they should be visiting tright professional exhibitions to detect the next trend iinnovation and must regularly train their staff to upgradtheir own level. There is a global trend towards morprofessionalism in the luxury industry to achieve a greatsense of excellence, creativity and renewed distinctivenes

Sustainable development: the futuredream of luxury

In November 2012, a rumour spread from the EECauthorities in Brussels that Chanel N°5 – the world’s moiconic fragrance, the epitome of Western savoir faire an

glamour – contained allergenic ingredients. The newspread quickly with the immediacy of the interneespecially in China where expensive things from the Wehave to be above suspicion. This led the whole Chancompany to reconsider its activities on sustainabdevelopment issues – such considerations were no longsomething that could be put off, but must be high on thcompany’s immediate strategic agenda. None of the band responsible luxury companies waited to pusustainable development on their agenda – and auditetheir whole value chain to make it cleaner. This procesencompassed the luxury subcontractors, which wer



suddenly asked to comply if they did not want to lose thecontracts. For example, printers of books and brochurefor luxury brands are now audited by the luxury brandregarding the inks they use, their printing processes and forth. Indeed, sensitivity to sustainable development issuseems to have accelerated, not so much at the consumlevel itself (Kapferer and Michaut, 2014) but rather at thlevel of the state and non-governmental organizations, well as among activists and watchdog groups on thinternet.

It is signicant that the Chinese Authority for Industrand Commerce has asked luxury advertisers to stopromoting luxury products in the media with words sucas ‘luxury’, ‘class’ and ‘royal’, and to stop building the cuof foreign products to maintain social harmony in Chinespecially among the middle class. Similarly, authoritiasked Louis Vuitton to destroy a giant attaché case it haput in the street just in front of its store in the Plaza 6luxury commercial centre in Shanghai. There is also Xinping’s recent ‘frugality policy’, an effort to enforce a

anti-corruption policy, knowing that luxury good(especially watches and expensive spirits) were a practigift to obtain any kind of favour.

As far as afuent buyers are concerned – the core targof luxury brands – our research on these issues (Kapferand Michaut, 2014) shows that people do not think muchabout sustainable development issues when they buluxury. Two main factors explain this:



1 Buying luxury is a parenthesis of pleasure: one donot want to obscure this moment with rational onegative considerations about the fate of the planesuffering animals, children working in factories, oexcessive waste. To protect their pleasure they opfor wilful ignorance.

2 Buying luxury is so expensive that consumers aentitled to make the assumption that luxurycompanies have already cared about all thesdemands and that there are laws in the Wesprohibiting misbehaviour in terms of sucsustainability concerns.

Yet our latest international research shows that sensitivitto green caveats is now growing among the afuent buyeof the world as well: they consider it the duty of luxubrands to take this into account. The buyers may take thifor granted so as not to be bothered themselves by thissues, but if it were revealed that their assumptions weinvalid, this would lead to signicant backlash on socinetworks and to boycotts (see Table 1.3).

TABLE 1 . 3 Afuent buyers’ sensitivity to sustainable

development and luxury (based on a scale ranging from1 = ‘totally disagree’ to 10 = ‘totally agree’)

FranceUnitedStates China Brazil Germany Japan

I could stoppurchasing aluxury brand if I

6.3 6.7 7.4 7.2 6.9 5.9



learned it didnot complywithsustainabledevelopment

By definition, aluxury brand isexemplary ineverything itdoes, hence interms ofsustainabledevelopment

6.0 6.7 7.4 6.9 6.4 6.2

I tend tochoose luxurybrands that arecommitted tosustainabledevelopment

6.3 6.7 7.6 7.3 6.6 6.0

It is noteworthy that the two countries in which thaffluent respondents’ sensitivity to sustainable developmeis highest are China and Brazil, both of which arrelatively new to the luxury industry; however, thescountries represent the future of this industry. Indeed, ouinteractions with China’s new luxury entrepreneurs durinour seminar on luxury at Tsinghua University (Beijinreveal that they are highly educated and do not want t

recreate the same type of companies as their parentgeneration. They know that China is too polluted and thewant to do something about this. This is why sustainabiliconcerns are now integrated as a prerequisite, a trend thais evident in the business models of many luxury start-upThis does not mean that these entrepreneurs want t



position their brands as eco-fashion or eco-luxury, butheir thinking is ahead of their Western competition aleast on these criteria. Doing so, the risk is that they coucreate a critical mass of luxury newcomers, a tippinpoint, with their new standard being afrmed as the normthereby disqualifying the competition of traditional brandThis is reminiscent of the US Lexus executive who statthat: ‘A very high quality that pollutes is no quality at al– the initial success of Lexus in California has been bason the rejection of German brands among the new loc

elites and the ability of these new afuent people to buy aexpensive dream car (silent and comfortable, with aexceptional level of service). But this dream car also cleacommunicates to others that its owner is a pioneer ancares about the planet – and is ready to pay the price for iThis is called ‘green conspicuousness’ (Griskevicius, Tyband Van den Bergh, 2010).

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Thomas, D (2008) Deluxe: How luxury lost its luster, Thorndike Press, NewYork



02Abundant rarity

The key to luxury growth

This chapter was originally published as an article Business Horizons, 55 (5), pp 453–62, Sept–Oct 2012.

Although the Western economy has not moved out of thnancial crisis triggered in 2008, the luxury sector

growing again, especially at the high end. In emergincountries, its continued growth is double-digit. As thepenetration grows, the prestige of brands such as LouVuitton or Prada is not declining at all. This seems at oddwith the concept of luxury being tied to rarity anexclusivity.

How can one reconcile these facts and theory? Thchapter rst recalls that the word ‘luxury’ has diff erentmeanings. Then we propose that in order to capturmounting demands, not only from extraordinary peoplebut f rom ordinary ones as well, many luxury brands enacvirtual rarity tactics, construct themselves as art and adop



a fashion business model. They de-emphasize exceptionquality and country of provenance. Rarity of ingredients ocraft has thereby been replaced by qualitative rarity. Thcult of the designer is a potent tool to build emotionconnections with a vast number of clients. Today, brandsin the luxury sector are actually selling symbolic and magpower to the masses. Finally, there is a culture gabetween Asia and the West. Asian consumers feel safbuying prestigious Western brands that are known beveryone around them. These insights provide clues f

entrepreneurs attempting to launch a luxury brand.

Luxury financial dream

Bernard Arnault, founder and CEO of LVMH, saystraightforwardly: ‘luxury is the only sector providinluxury margins’. In July 2011, after three years oparalysis, the afuent class in the United States is agafuelling luxury growth. It is difcult to postponindenitely an unnecessary but very appealing desire buy a luxury product. Interestingly, it is the high endultra-qualitative, not too conspicuous but fully priceproducts that are ying off the shelves (New York Time2011). One effect of the 2008 economic crisis on thafuent – the top 20 per cent of income earners whtogether represent 60 per cent of the market – is to refocuon real value and great classics, and to pay the price fothem. In a sign that the sector is exploding again



especially in Asia, 2011 was a year of new acquisitions luxury companies and brands by investment funds froAsia and the Middle East, and by luxury groups (LVMHKering, Richemont). Prada had its initial public offerin(IPO) in Hong Kong in June 2011. In all cases, the higmultiples (around 20) measuring the valuations of thecompanies demonstrate that investors share the dreamThey believe that the sector’s prospects for growth ahuge (Tabatoni and Kapferer, 2010). They are right: thefuture is bright, especially in the BRIC countries (Braz

Russia, India and China) and soon in the CIVET(Colombia, Indonesia, Vietnam, Egypt, Turkey and SoutAfrica). In all these countries, GDP growth is high, a nprospect since Bernstein Research nancial analysshowed that luxury market growth is strictly correlatewith GDP growth. The latter creates a middle class anfosters optimism. Consumers in these countries generaldo not save for their retirement (unlike consumers Europe), but rather spend for newly available beproducts, especially those that confer status and serve assymbol of their own self-achievement. In BRIC aCIVETS countries, there is no middlrange. Consumers nd local brands or global fast-movinconsumer goods brands for everyday life, and luxurforeign brands to reward themselves. Having developconsumption societies quite late, people in these countriadvance by leaps and bounds and claim their right tluxury. Visiting the newly built luxury malls is a favourileisure-time activity. What was once described as th



‘malling of America’ (2002) has now become the malliof Asia or even of the world, with retail and entertainmenmixing into ‘retailtainment’ within superb luxury stores.

To capture mounting demand for luxury goods innewly rising cities, major luxury retailers are now engagin a very dynamic store expansion strategy. Thus, LouiVuitton announced that it would enter so-called third-tiecities – mainly provincial capitals – in China. Today, thbrand has 37 stores across 29 cities in China. This move driving the luxury brands (eg Gucci, Zegna, Coach

Burberry) into these same third-tier cities.This fast-paced retail expansion strategy would be goonews for the luxury business, if only it could twist thbasic equation <luxury = rarity>, which predicts (Figu2.1, A) that a product’s luxury status (which is crucial focommanding high prices) will be diluted when ipenetration rate increases, because too many people owit. A less stringent prediction is that increasing penetratiorst boosts a product’s luxury status (by making the branvisible and recognized), but with a tipping point beyonwhich luxury status dilution occurs (Figure 2.1, BChinese third-tier cities represent big numbedemographically speaking, but by entering them luxubrands run the risk of becoming provincial themselves.FIGURE 2.1 Luxury–rarity relationships



Brands such as Louis Vuitton have thus far succeeded postponing this tipping point. Fifty per cent of womeworking in ofces in Tokyo possess a Louis Vuitton ba(Chadha and Husband, 2006), yet according to Ipsos dat(2011) consumers in Japan still regard this brand as thmost luxurious. Is the luxury industry actually inventincase C (Figure 2.1), in which luxury status is not dilutebut actually reinforced by the penetration rate?

The many meanings of luxury

Why is there apparently no contradiction between suchigh penetration of a luxury brand and its resilient luxur



status? It could be due to the many meanings of the worluxury itself. One must make a clear distinction betwee‘luxury’, ‘my luxury’, ‘the luxury sector’ and ‘the luxubusiness model’.

Luxury as an absolute concept

This typically evokes images of the lives of the rich apowerful, the ‘ordinary of extraordinary people’. It is n

surprise, as J Castarède (2008) has reminded us, thaluxury DNA is to be found in the history of society’s eliteLuxury was rst found in religious temples, churchepagodas and Egyptian pyramidal tombs – tributes talmighty God and attempts to buy mercy through thsacrice of wealth. Later, luxury became the signal of ranin all aristocratic societies (Podolny, 2005). As Batail(1991) showed, one’s rank is demonstrated by one’s abilitto sacrice productive resources to buy non-productivitems. In the past, luxury was the consequence of socistratication. Only recently has there been a paradigmatishift: luxury now creates social stratication in countriein which it did not previously exist (Kapferer and Bastie2012). As a newly rich Chinese man puts it in a focugroup: ‘What I like in luxury is that it is expensive.’ Thisluxury’s core, latent sociological role, despite the ovealibis or rationalizations that consumers may provide wheasked in surveys why they purchase luxury items fthemselves.



Interestingly, when asked ‘What examples of luxurspontaneously come to your mind?’ typical answers ainaccessible products or lifestyle elements of the very r(helicopters, private jets, private islands in paradise seand so on). Luxury as an absolute concept needs no bran(Kapferer, 2010), as people talk more about lifestylelements than about products. However, if the intervieweinstead asks ‘What brands come to your mind when yohear the word “luxury”?’ then the answers change anrefer to products or services, with the list being more o

less the same worldwide: Louis Vuitton, Chanel, GuccRolex, Ferrari, Dior, Prada, Bulgari, Ritz-Carlton and soon (Ipsos, 2011). Note that these brands are moreaccessible than the former evocations. They alscommunicate a lot in the media and through theimagnificent stores.

My luxury

This most often refers to a personal, small luxurpurchase. A typical example would be buying a Diolipstick (€24). The word ‘lipstick effect’ is attributed Estée Lauder, founder of the skincare company, who wasurprised by the increase in lipstick sales during the GreDepression. It is an example of the well-knowphenomenon that, after a psychological stress, wometrade up on affordable luxuries, as a substitute for morexpensive items. My luxury is clearly a break, a disruptio



from normal life and its many constraints – an escape inan ideal world of beauty, pleasure, taking care of oneseland a bit of eternity. One compulsorily buys what onshould not buy, an unneeded product or service, at a pricfar above what functional values command. This overqualitative product, with an excess of small details, bought to pamper oneself, to offer oneself a gift, a rewarHowever, it needs to be from a prestigious brand: selhealing requires big names in order for its magic operate. This is exactly like the placebo effect by whi

patients’ illnesses disappear because they believe that thare taking a real medicine with a famous brand name. Thlipstick effect only works with brand names that evoke thlifestyles of the rich or famous. It also requires a sacriof money. As anthropologist Marcel Mauss (Hubert anMauss, 1981) showed, this high-price sacrice is thcondition for the product to become sacred and to endowthe buyer with its blessing.

Luxury is also an economic sector

This is the meaning that is implied when one talks abothe growth of luxury. In fact, Bain & Company, aconsulting company specializing in the luxury sectoregularly publishes forecasts about luxury sales. How doBain generate these forecasts? Its analysts add up gurprovided by 290 brands considered by syndicateauthorities to be part of the luxury sector. In Italy, France



Germany and the UK there are syndicated authorities thact as representatives of the collective interests of tluxury companies (ie those that belong to these syndicateThe luxury syndicate in Italy is called Altagamma. France, it is Comité Colbert, representing one-fourth oworld luxury sales, twice as much as Altagamma. Theluxury syndicates are not independent of the companithemselves and work like a club. Any new member has be co-opted, and must behave according to a set of criterand values in order to be admitted. However, not al

members would be widely perceived as luxury brandThus, in France, although almost no one would consider Lacoste polo shirt to be a luxury product, Lacoste, as company, is part of Comité Colbert, and as a consequencLacoste’s sales are taken into account in French luxursector forecasts. Similarly, Illycaffé is part of AltagammIn contrast, Corneliani, the Padovan luxury men’s fashiobrand of Italy, is not part of the Italian syndicate, eventhough its stores are located just in front of those oZegna. Corneliani’s sales are therefore not included iItalian luxury sector data. Bain’s forecasts do not includautomobiles, ve-star hotels, resorts, etc – rather theconcentrate on luxury fashion, leather, watches, jewelleryshoes and so on. In order to continuously grow, thescompanies have decided – following LVMH, the worldnumber-one luxury group with more than 50 luxurybrands – to democratize the sector, and to capture part othe massive demand in emerging economies, BRIC CIVETS, in which a middle class is growing, with



appetite for recognition, status and pleasure. To do somany luxury brands (considered as such by corporativsyndicates) have moved away from the classical luxubusiness model in two major ways.

First, many luxury companies now base their prot ologotyped accessories or second lines, produced in largseries and sold as fashion objects, such that consumeneed to buy a new one each season as the fashion systedictates (eg the famous ‘it bag’: Aspers, 2010). Fashion about contagion of desire (Girard and Gregory, 2005)

Thus, the number of consumers buying the samfashionable product ceases to be a problem, especially Asia where Confucian rules forbid being too original. apan, unlike in individualistic Western societies, wearin

the same Louis Vuitton reinforces feelings of togethernewhich are very important there. In Asia, in fact, luxurcreates both distinction from others and at the same time sense of belonging.

Second, many luxury companies have abandoned major obligation of the luxury business model: ndelocalization. Prada, for example, by making some of iproducts in China has reduced its production costs animproved its gross margins, thanks to low labour wagethereby making the company still more appealing to Asiinvestors who have been able to buy the company’s sharon the Hong Kong stock exchange since June 2011. Aftall, Coach (the New Yorker brand) has been delocalizefor a long time. Lower production costs also allow thbrand to invest more in communication in order to buil



the dream that consumers associate with it.

Luxury is a business model

This has been empirically ne-tuned through time by tholuxury brands that dominate the pantheon worldwideLouis Vuitton, Chanel, Gucci, Hermès, Ferrari, Rolex anso on. These companies, many of which are still famiowned, have crafted a unique common business model,

pillar of their resilience and protability. This businesmodel runs contrary to most present business models any sector. It rests on strict principles that maintain thuniqueness of luxury and preserve the non-comparabiliof those luxury brands that stick to it (Karpik and Scot2010). Here are a few examples, some of which have beecalled the anti-laws of marketing (Kapferer and Bastie2012):

• Do not delocalize production: luxury is theambassador of the local culture and refined art devivre.

• Do not advertise to sell: luxury communicates tobuild the dream and to recreate it. This is notmeasured by short-term sales increases because,unlike fast-moving consumer goods, possession of aluxury good dilutes the excitement one had beforethe purchase was made.



• Communicate to non-targets: part of the value of owning a luxury good is the quality craftsmanship othe product, but another necessary part is therecognition by non-owners. This is why AstonMartin, although a very small brand, used productplacement in the blockbuster James Bond movies – that everyone in the streets could recognize one, thuendowing the driver with admiration.

• Maintain full control of the value chain: fromingredient sourcing to the retail experience, luxuryquality can only be delivered if the brand has 100 pecent control.

• Maintain full control of distribution: this is whereone-to-one service and interaction should take placeThe experience must be exclusive.

• Never issue licences: licensing necessitates loss of control and increases the risk of consumers having abad experience. Luxury promises exceptional qualityand an exceptional experience, but licensors must beprofitable even after having paid important licensingfees. This can only be achieved by reducing thequality of the products themselves or of the

distribution. This is why between 1998 and 2008Ralph Lauren retail sales from licensing decreasedfrom 60 per cent to 35 per cent. The US fashionbrand bought back many of its licences worldwide.

• Always increase the average price: since the middleclass gets richer, to remain its dream the luxury



brand should never trade down nor cut its prices. If does create some accessible lines, this must be doneon a limited scale and be counterbalanced bysystematic trading-up. All new models of Jaguar, foexample, when managed by Ford were designed tomake the brand more accessible. The brand nevercreated its own ‘S Class’ (as Mercedes did).

• Develop direct, one-to-one relationships with clientsLuxury means treating all clients as VIPs. Thisnecessitates direct, personalized, one-to-one

interaction, ideally in exclusive stores that representthe dream in 3D.

This luxury business model can be applied to companies any sector. Thus, Apple, MINI and Nespresso are typicaexamples of companies that are not considered to bluxury companies, but nevertheless follow the luxubusiness model. There are other business models amonthe high-end labels: the fashion business model and tpremium business model. The main characteristic of thfashion business model is that it delocalizes production search of low-cost labour forces. Unlike luxury, fashiodoes not sell timelessness. As soon as the fashion seasends, sales and super-sales that slash margins are employto eliminate inventory. Fashion does not worship quality much as luxury does.

As for pricing, in the luxury business, model averaprices should always go up (this does not prevent havinsome access prices), as there are enough newly ri



consumers to justify this strategy as long as they dream the brand. When this dream falters, many luxurycompanies prefer to expand downwards, selling to morpeople, thanks to protable accessories that have moraccessible prices and are produced in larger quantities countries with low labour costs. Such accessories are to bought repeatedly by the clients, a sign that the luxurbrand has moved to a fashion business model, in whicoriginality and change are valued, not rarity antimelessness.

The premium or super-premium business model reson the willingness to create an objectively ‘best’ produGrey Goose super-premium vodka, for example, advertisitself as the ‘world’s best-tasting vodka’ since it hreceived many awards from expert juries. Unlike luxurwhich refuses any comparison, super-premium brands loofor it and build their fame through it.

How scarcity creates value

It is a basic law of economics that when demand is largthan supply, price goes up. In one behavioural experimensocial psychologists Worchel, Lee and Adewole (197made some cookies suddenly become unavailable to ogroup of persons, while another group could still buthem. Post-experiment measurements showed that thperceived value of these cookies was higher in the rgroup than in the second. Apple capitalizes on this effe



by creating an articial scarcity at each new produclaunch: people queue the whole night in front of its storand are price insensitive, even though they know almonothing about the new product. The same effect can bseen in services: it is a good signal of value when one hto book many days in advance in order to get a table in particular restaurant. Should the restaurant owner thenincrease the number of tables and capture a higher daiturnover? Of course not! Doing so would reduce the queuand dilute the scarcity effect and, hence, the attractivene

and pricing power of the restaurant. Remember el Bulrestaurant in Spain, which was widely considered to be thbest restaurant in the world; the waiting time for a tablwas over one year. Its creator decided to stop this – buwouldn’t it have been better to create a second line, withfew restaurants that are more accessible in price, located fashionable areas but still with a queue? This is typicalwhat is done by most famous chefs holding the Michelthree-star recognition. The second line builds the chefstar brand awareness and the three-star restaurant keepthe ame alive for those rare few who can access it, afterlong waiting time and an important sacrifice of money.

From scarcity to qualitative rarity

Romanee-Conti vineyards produce only a few thousanbottles per year. Ferrari restricts its production too, adoes Patek Philippe. Hermès Kelly bag sales are limited



the actual scarcity of more-than-perfect crocodile skinThese examples are famous: they entertain the myth luxury as a rarity business. But physical rarity (scarcity)not welcomed by shareholders of listed luxury groupsince it prevents fast growth. Even though some brandsuch as Hermès, hold to this objective rarity, the luxursector has grown thanks to a shift to what may be callevirtual rarity – everything that gives a feeling of privileand of exclusivity (Groth and McDaniel, 1993).

In fact, objective rarity is quite boring. It is als

insufcient if the ingredients are not perceived as noblThis is why sustainable luxury is difcult to grow. StelMcCartney, for example, refuses by conviction to usleather in her fashion lines and accessories. Hecraftspeople therefore painstakingly make use oalternative fabrics, none of them being held as noble. This a typical premium or a fashion endeavour, but lacks thdream factor attached to luxury.

It is time to acknowledge that modern luxury enacts qualitative rarity. It embodies a level of over-qualitywhich runs contrary to all the trends of modernindustrialized production processes and dees all laws value analysis, the method by which the costs associatwith features of a product or service are reduced whimaintaining the features’ target value for the consumeThis qualitative rarity can be enacted through thproduction process, if for instance handwork is needed ttie a precious red ribbon on each Chloé fragrance bottle oto engrave a seal on each Royal Salute bottle of whisk



Non-delocalization is also part of this construction ovalue, as is the culture or historical reference that embedded in the product.

Introducing virtual rarity

Rarity can also be articially induced. One classic way sustaining desire for brands that now opt for longer serieand extended production is to regularly launch limite

editions that capture media attention and sustain thdesirability of the brand through ‘ephemeral rarityAnother essential lever for creating a halo of privilegeselective, if not exclusive, distribution. Luxury rarity built at retail. Thus, there is no Louis Vuitton fragrancefor this brand refuses to sell anywhere but in its owstores. Fragrances, however, are closer to mass markethey need wide exposure. Most luxury fashion brands havchosen to sell their fragrances (a key lever of branawareness, image and prots) through selectivdistribution: selective department stores, the mass prestiSephoras, Douglases and the like. This restrictedistribution endows these brands with a halo of glamouand feelings of privilege. In a Chanel skincare and make-shop-in-shop within a department store, any woman cabe cared for like a VIP, even if only for a few minuteFinally, communication also builds virtual rarity. To buildthe dream, the luxury brand must communicate far beyonits actual target. The brand, its products and its price



must be known by many, even though only a few shoulbuy it. This is why Chanel typically advertises its moprestigious jewellery line, not the accessible one. Luxubrands capitalize on a few celebrities or even one singbrand ambassador who symbolizes uniqueness. Also, thsystematic use of social events by luxury brands aims exhibiting the brand’s selectivity through the press and thinternet – by publicizing who it invites to these events.must be shown that not just any celebrity can come.

From craft to art: elitism for all

A most signicant shift is taking place: the starification designers. There is a real cult of the designer. Unlike thartisan, famous for his or her know-how, designers nowbeg for recognition as real creative artists. Some, such Karl Lagerfeld, demonstrate that they have other talensuch as photography or cinema. John Galliano presenhimself as a work of art, staging the typical gure of thromantic artist. Little by little, art pervades commercespecially luxury commerce. Louis Vuitton promotavant-garde artists such as Stephen Sprouse and TakashMurakami. The Musée des Arts Décoratifs in Paris hosthe Ralph Lauren collection of vintage automobileCartier, to build its prestigious image, installed temporary museum within the Forbidden City in BeijinIn Seoul, the Prada Transformer is a striking building ithe shape of a tetrahedron, with the capacity to change it



own form and function. Luxury likes to be associated wiart, because, just like art, it aims at being perceived aintemporal. Diamonds are forever, as is a Porsche 911This intense proximity between art and business haanother goal: to position products as authentic pieces ocontemporary art, each one blessed by the hand of thdesigner. By doing so, luxury brands de-emphasizcraftsmanship, which requires time and effort and is nocompatible with volume (Catry, 2007). Art enhances alsthe brand extensibility beyond its core product (Hagtved

and Patrick, 2008).Thus, the transformation of luxury fashion designers aart icons is a consequence of the search for growth througaccessories. Companies will typically look for designwith personality, able to create followers and emotionabonds among larger audiences. It is notable that designeshould be avant-garde. They should purposely not appeto everyone, thus creating a cultural elite of followers, ricor less rich. The designers capitalize on a cultursegmentation, on people who like to think of themselves the creative elite. Built by the media and social media ascultural icon, the designer’s charisma is a source oauthority and aura, and bits of that aura are passed toclients through the purchase of products. When one buys special item in the Marc Jacobs e-boutique (eg a Rubixcopurse at US$18, or neon rain boots at $28), one has thfeeling that these items have actually been designed Marc himself. Despite their low price, this feeling of extraordinary object is reinforced by the fact that, as th



luxury business model prescribes, they can only be founat Marc Jacobs stores. Finally, the purchase indicates oneadvanced tastes and acts as a social marker. Art andculture create an elitism for all, which can be leveraged selling more products to more people, without dilutintheir appeal, because these products are held as art objectnot as commercial products.

This desire to look non-commercial, and to appear tbe fully part of the world of art, is exemplied badvertising. Nowhere should it obey the classical rul

taught by Procter & Gamble. For luxury, the less explicand understandable the advertising is, the better it isAdvertising here seeks to create a distance, but at the samtime it also tries to communicate to the many. This sociaconstruction of advertising as art holds communication aa full ‘product’ of the creative brand. Dior ads are to btreated in the same way as its bags or dresses. This is whluxury brands do not have communication directors. It the creative director who imposes his or her vision on athe of the brand’s productions. A consequence of this trenis that some luxury brands advertise that they will soohave a new ad and inform about the famous photographerecruited to create it, the top models it will feature, thincredible place where it was shot, etc. Similarly, luxurbrands now put videos on YouTube and other social medisites, documenting the making of their TV commercialSince advertising is by its essence non-credible, by focuson the artful construction of this incredibility, the luxurbrand reduces its commercial undertones.



The new reality of Asia: egalitarianluxury?

Most of the rules of luxury brand management have beeinvented in the West. They reect the sociology of Westersocieties, and are dominated by concepts such adistinction, class differentiation and elite culture. In suchcontext, increasing the penetration of a luxury brandilutes the feelings of privilege. As a result, the snoaccept to pay more so that the conformists can no longebuy at that higher price (Amaldoss and Jain, 2005). This conrmed by the dream equation (Dubois and Paternaul1994): the desirability of a luxury brand is correlated witthe difference between brand awareness and branpenetration. Unknown brands do not create desire anmagnetism. But when luxury brands are too massmarketed, going after all consumers (Nueno and Quelc1998; Silverstein and Fiske, 2003) in the so-calldemocratization of luxury, they lose their cachet. They arno longer distinctive enough – at least in Westercountries, maybe not in Asia (Phau and Prendergast, 2000

Since 1980, Japan has been the goldmine of the luxu

sector. Now, China will soon become the world’s largesluxury market. Interestingly, Japan has a very egalitariaculture, yet it made Louis Vuitton the world’s number-onluxury brand. This looks like a paradox, but it is not. Oneshould keep in mind that, when penetrated by luxurbrands, Japan had the largest middle class of all develop



Is the cult of luxury religious?

A religious phenomenon seems to be acting in the luxubusiness. In Asia, a literal ‘cult of luxury’ exists (Chadhand Husband, 2006), which in Japan appeals even tteenagers. Western youth have also adopted luxury brandsThey mix and match luxury accessories with casuclothing. Why has luxury extended this far from its naturaborders? If Francis Fukuyama (1996) is right, since thcollapse of communism there are no more ideologies, least those that promise paradise on earth. Onlyconsumption remains, and in its highest form: luxurgoods, which embody both high creativity and heritagand are very qualitative, hedonistic products, impartinquality craftsmanship, high symbolism, glamour antransgression (through the excessive price).

Luxury is a process of spiritualization of human-madobjects. This is why price is so important, as well as thblessing of cultural and powerful elites. An excessive pris the measure of one’s desire, and hence of the desirabiliof the object, based on values that have nothing to do witdown-to-earth practicality. By sacricing an importanpart of their salary for the purchase of a luxury bag, thTokyo ofce worker builds the sacred nature of the objec(the etymology of sacrice is making sacred). Tsimilarities with an actual cult are many. We have alreadanalysed how, in order to sustain this cult, luxury brandseem engaged in the marketing of adoration, starting wi



that of the iconic designer. The iconization of somproducts of the brand’s range is also signicant. It is howluxury creates a counterweight to the loss of aura createby the large-scale technical reproduction of productIconic products are meant to look intemporal, almoseternal. This is achieved in two ways. First, they arpermanently in the catalogue – like the Porsche 911 Chanel N°5 or Jaeger-LeCoultre’s famous Reverso watcThey are also made intemporal by relating them to somhighly signicant moment of the life of the brand

founder. The spirit attached to this moment and the storythat goes with it endow the product with part of the aurthat its production in long series had destroyed. The iconproduct becomes an object of the cult. One needs tpossess at least one, once in one’s life. Luxury brands alscultivate mythical stories about their foundation, anmaintain high secrecy on their present back ofc(concerning production sites and quantities, nances, etcTheir agship stores, magnicent pieces of urban adesigned by famous architects, have been compared modern cathedrals, in which faith is reinforced. In thesstores, each product is put on a pedestal, like a holy statuor icon. The stores act as closed shrines where a subtsecret order reigns and where one is introduced selectivelhence the queues outside. Consumers visit the stores small groups, as in a pilgrimage, and wish to attend thrituals delivered there on a one-to-one basis (welcominservices, mode of address, demonstration, explanation othe exceptionality of each item, etc). This comparison wi



religion is most revealing: luxury likes to present itself an elevating cultural force. It belongs to the upper tier oMaslow’s pyramid, that of self-realization (Maslow2011). Religions like big numbers, large communitieunless they wish to remain as a small sect.However, the comparison with religion has limits, anone may therefore talk instead of magic. As their Latroot suggests, religions tie people together in their belief God in heaven. Magic instead invokes supra-natural forcin action on earth, thanks to the mediation of objects

icons and shamans. As anthropologist E. Arnould wrot(Arnould and Curasi, 1999: 264): ‘their possession linkthe owner or holder with immanent powers to achievcertain ends’.

There is something magic in the possession of luxugoods. They endow the owner with the ability to becomanother person just by wearing a blessed cloth, jewel oaccessory. The starification of modern fashion designers an essential prerequisite if luxury brands want to appeal tlarger audiences. These designers are not mere humans anmore, but lead their followers in the world of art, creativculture, taste and sensory experiences thus far restricted the elite. Their magic touch is passed along by contagiofrom the designer to the end user. There is no need anmore to link luxury to rarity or a nite number of clientsAs expressed by the dream equation (Dubois anPaternault, 1994), the larger the number of clients, thmore famous the name must be in order to keep the dreamalive.



Nurturing the symbolic power of theluxury brand

Symbolic power is now fuelled not by rarity, but by ththeatrics of qualitative rarity. Unlike mainstream brandswhich have a single logo (Nike’s swoosh, for exampleluxury brands develop a ‘chest of symbols’. Thus, Chanhas a magic number (that of Rue Cambon’s rst shop iParis), the camelia ower, etc. Symbolic power is alsnurtured by the designer’s visibility as very singular athe brand’s highly creative communication. Hence thimportance of fashion shows, those rituals of défilés hein capital cities, acting just as medieval horse jousts ondid to designate the bravest to the public. At each défilthe designers agree to compete in front of the cameras the world. This is the condition for their fame to bmaintained. Similarly, in the automobile business Fcircuits play the same role for Ferrari or Mercedes. This why giving mass-market brand names to the racing teaminstead of the automobile makes F1 lose part of imystique: one does not hear about Mercedes any more, buabout the Red Bull team. The widespread extension o

luxury brands’ communication far beyond the classglossy pages of magazines is also part of this phenomenoas well as the late but powerful entrance of luxury brandto the internet and social media. In 2011, Louis Vuittocreated its own digital in-house agency with 400 employeworldwide. Their goal is to diffuse content about the bran



all over the internet: history, heritage, unveilings of thcraft, social events, creative interviews, fashion showcreative travel guides, limited editions, etc. If the luxubrand wants to stand above its many copies anlookalikes, selling only an image of luxury, it must captuattention on the internet and reveal its depth and innitcreativity.

Short-term or long-term policy?

The goal of a luxury policy is to build pricing powemaking clients become fans of the brand and pricinsensitive. Some luxury brands, pushed to grow by theshareholders, have decided to increase their penetratioamong the public, while trying to maintain high priceThis has been achieved by releasing many constraints the luxury business model, such as objective rarity and ainformal rule forbidding delocalization. Instead, thesbrands have adopted a religious model of communibuilding in which adoration of iconic gures, experientiselective distribution, and highly visible creaticommunication play a central role in reinforcing the faiof the many and the symbolic power of the brand. Buthere is a danger: the trade-off between short term anlong term. Knowing that luxury can be dened as thordinary of extraordinary people and the extraordinary oordinary people, the question becomes: How long will thformer dream about such a brand? These people play th



stores, it aims at making the provincial client in a C-towstill dream of accessing the store when he or she visitsmore important town. Clearly, there is a long-term riskhere. This may be one of the reasons why LVMH, thworld’s number-one luxury group, had taken an uninvite20 per cent share in Hermès, the brand whose formeCEO, Patrick Thomas, said: ‘When a product sells tomuch, we stop it.’ Hermès wants to remain a luxurbrand, not become a fashion brand. It could potentially acas the post-Louis Vuitton brand in the LVMH multiple

brands brand portfolio.

Conclusion and clues for entrepreneurs

The future luxury brands are in the making. Everywhere the world, entrepreneurs are creating luxury products anhoping to build their own luxury brands. They now clearlunderstand how much they should from the start positiothemselves as ‘art and craft’ rather than as productsBuilding a luxury brand takes time. One does not launch luxury brand as one launches a fast-moving consumer goobrand, with a D-day signalling the start of an extensivmarketing action plan. Instead, the entrepreneurs shoulcommunicate through their creative director and knit cloties with cultural elites, cultural places, art places … wia strong preference for avant-garde, especially if they wato represent the future. They should also understand thathe classical distinction between products an



communication is meaningless in the luxury worlProducts are communication, and communication shoulbe undertaken with the same exceptional exigency fstyle, for ultra-qualitative details as any of the productAlso, it is important to build a qualitative rarity, beyondan objective rarity: even newly bred brands shoucommunicate about their heritage, their inspiration, theicultural references, their being the ambassador of thexcellence of a culture. Ralph Lauren has remarkabpaved the way. But more recent examples are interestin

benchmarks: Bell & Ross, a watch brand that is now parof the Chanel Group, is only 25 years old, but looks as if has existed since the Second World War. Everywhere – othe internet, in stores, in the packs around the watches, icommunication and the design of their products – arhymns to the right stuff, those hero pilots who pushed thlimits of supersonic jets. This is how new luxury brandacquire depth and brand content, thus sparking the desirfor the acquisition of their very symbolic products.

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03The artification of luxury

From artisans to artists

This chapter was originally published as an article Business Horizons, 57 (3), pp 371–80, May–June 2014.

G rowth is the biggest challenge for a luxury brand, ithat volume dilutes the brand cachet. In addition, i

violates the credo of rarity, on which the luxury sector ioriginally based. This chapter reveals how the currenleading luxury brands use ‘artication’, a process otransformation of non-art into art, to circumvent thevolume problem. Artication takes time and substantiainvestment. It cannot be undertaken by the brand alone;

requires the active collaboration of art authorities anrenowned artists. The goal is to change the status of thebrand, of its founder and products, and in so doing toreinf orce the idea of a better-than-ordinary brand, whoseprice and symbolic power are undisputed. It is alsstrategic f or the globalization of luxury: art is universal.



The challenge of growth for luxurycompanies

Growth is the biggest challenge for a luxury brand. Luxubrands should not endeavour to remain small; yet they faa real challenge of growing while remaining a luxubrand. This statement may come as a surprise; recenheadlines have marvelled at the economic story of tluxury sector – one that, despite the global recessiotriggered in 2008, has continued its growth, reaching €21billion in sales in 2012 (Bain & Company, 2013)However, this understanding of the sector presupposes thait refers to luxury brands; in reality, the ‘luxury sector’ ismacroeconomic entity comprised of heterogeneocompanies and products, only a few of which follow luxury strategy. Because the word ‘luxury’ has becomfashionable, many companies use it, even if they afashion houses or premium brands. However, ‘luxury‘fashion’ and ‘premium’ are not substitutable: they refer three totally different ways of managing a compan(Kapferer and Bastien, 2012). The popularization anoveruse of the word ‘luxury’ thus blurs distinctions an

creates managerial confusion. Even Starbucks coffee hbeen described as ‘romance, relaxation and luxury’ (Clar2007: 94). It would be more accurate to use words such a‘gourmet’ or the good/better/best hierarchy to describthese products and use ‘luxury’ only in its narrowmeaning.



For a premium or fashion brand, growth poses nodifculties: the more the better. For example, masstigbrands, such as Ralph Lauren’s mass-produced clothes, arof good quality and made at low production costs iChina. Value is created by prestigious retail stores, madto resemble a mansion, materializing the American dreamTo access this dream, the brand offers, for example, panoply of clothes inspired by the Hollywood movie TGreat Gatsby, which evokes East Coast gentry, itselinspired by English aristocracy. Volume is not a problem.

The problem of growth for luxury brands is that supplshould always be below demand; thus, growth is sougafter, but cautiously. This goal is especially salient in thearly 21st century as luxury brands face surges of demanin developing economies such as Brazil, Russia, India aChina (the BRIC nations). Meeting such demand coumean banalization, loss of lustre (Thomas, 2008) and loss of exclusivity – all preambles to the loss of premiupricing power.

To mitigate this risk, some luxury brands limit theivolume. For example, Rolls-Royce indicated that in 2013aimed to sell just one car more than it sold in 2012emblematic of a strategy that concentrates on thmultiplication of custom-made products. At Hermèformer CEO Patrick Thomas insisted that ‘as soon as product sells too much, it is discontinued’, though appears that this rule applies to bags and silk scarves, noto watches and fragrances, which are sold througwholesale channels to multibrand retailers.



This chapter analyses a transformation of luxury thaaims at solving the growth dilemma: to become biggwhile keeping a luxury strategy and meet mountindemands that can attract new competitors. Thitransformation is also motivated by the need to reinforcthe legitimacy of the luxury sector as a whole. All sectomust defend their right to exist; it is never given a prioAs long as there has been luxury, there have been moracriticisms of its excesses and its cultivation of inequaliThese latent criticisms have been revitalized as a result

the pervasive presence of luxury in today’s society.In turn, we argue that the growing multiplication oassociations of luxury brands with artists, galleries anmuseums is not accidental. Luxury brands are actualengaging in a subtle process of ‘artication’, thtransformation of non-art into art. The luxury industryaims to be perceived as a creative industry.

This chapter therefore begins by diagnosing thproblems created by luxury growth and analyses how anwhy art can answer these challenges. It then explores thconcept of artication, the process of transforming a braninto an example of art. The chapter concludes with discussion of how several luxury brands have implementthis strategy.

The radical transformation of luxury today

Luxury has become fashionable, and its status in socie



has radically changed. Etymologically, the word luxumeans ‘overabundance, excess, beyond necessity’. Fcenturies, luxury was limited to the happy few. It was thexclusive lifestyle of those in power: pharaohs; kingqueens and their courts; and later merchants anindustrialists. It was meant to express rened taste animpress crowds by the magnicence of the palaces, horcarriages, dresses, jewels and so on. This origin is latetoday in the consumer psyche; asked what products comto mind when they hear the word luxury, consumers d

not talk about watches or leather bags but mention yachtshelicopters, private islands and supercars – that is, aidealized lifestyle accessible only to the wealthiest. Tvery specic luxury – called ‘überluxury’ – does exist butconfined to a select few consumers.

Luxury is a microeconomic sector that has grown sinthe mid 1990s, slowly extending its customer base beyonthe happy few to the happy many, the so-called middlclass. This is why this sector is growing fast and capturso much corporate and media attention. Considering Chinalone, the size of the world’s largest middle class – wiearnings between US$10,000 and US$60,000 – is estimatat 300 million people (Wang and Wei, 2010). Thechallenge for luxury brands is determining what to do withis tsunami of demand.

In Asia, where the growth of this market is mosnotable, a radical transformation has taken place in whichparadoxically, luxury is no longer ‘a luxury’ but insteahas become a seeming necessity, as manifested by th



queues of Chinese tourists in front of Louis Vuittoagship stores in many major cities. There are a number oreasons for this radical transformation, which representnot a democratization of luxury (through lower prices) burather a democratization of the desire for luxury at higprices:

• In emerging countries, growth is accompanied byurbanization, which creates a context of highcompetition. People need to define their identities tothemselves and others.

• Booming economies develop meritocracy and socialstratification, so people need clear hierarchies toidentify how high they stand or wish to be perceivedThese hierarchies rely on not only possessions butalso well-known prestige brands.

• Unlike Western consumers, Asian consumers buyluxury not to differentiate themselves but to avoidbeing considered socially below others. Japan, Koreand China are competitive economies, at bothmacroeconomic and individual levels. Each personfeels an obligation to succeed in order to gain esteemfrom others (Chadha and Husband, 2006), whichaffects their major consumption choices, includingtheir children’s education. Success must be visibleand the markers unambiguous and respected. Thus,Asian consumers consider wearing a luxury suit,watch or leather accessory as a necessity to maintain



face – as a universal social visa. This trait alsoexplains the growing counterfeit economy:counterfeits are the poor consumers’ luxury, theirway to adhere to the norm. Fake products are thegateway before trading up to authentic products.

How growth creates two major problemsfor luxury brands

Growth is a blessing for all brands, if they are protablFor luxury brands, however, it is a mixed one. Growth inot an issue for premium brands (eg top Germaautomotive brands), which in principle do not set volumlimits but instead seek to gain market share and newconsumers by always improving the performance an

services of their products. Similarly, fashion brands extentheir distribution to seize this source of growth.In contrast, luxury brands represent much more than

products, regardless of their performance. They reect thtaste of elites. By extending from the happy few to thhappy many, luxury brands moved from the ordinary othe extraordinary people to the extraordinary of thordinary people. As a consequence, the rst challenge foluxury brands is nding a way to grow while stiappealing to extraordinary consumers, those who ensurthe long-term desirability of the brand.

To keep the wealthiest clients while extending the



customer base, luxury brands permanently raise theaverage price level. They also limit the number accessible items for luxury ‘excursionists’, who do ntypically buy luxury items but may ‘splurge’. Anothoption is dual management: specializing labels with theown lines and retail network, one of which is extremeexpensive and highly selective and the other that is moaccessible (eg Armani Privé versus Emporio Armani, RalLauren Black Label versus Polo Ralph Lauren). Thselective labels continue to develop sophisticated ra

products, limited editions and special orders.Growth creates a second problem for luxury brandsBooming demand for high-quality, expensive goods attracmany new competitors, with innovative business modethat challenge the classical luxury brands. For examplChanel and Louis Vuitton are currently challenged bCoach. The situation is acute in developing economies, which new luxury consumers have not learned thhierarchy of brands. In these economies, consumers are nloyal to brands, lacking knowledge about why they shoustay with brand A instead of brand B. The differencebetween the products are not evident, and neither are thbrands’ advertising messages or retail store experienceFor example, Coach’s website reads: ‘Artisans aninnovators, we continually rene and perfect oucollections to create some of the most luxurious handbain the world.’ Chanel, Prada or Bottega Veneta could writthe same words.

How, then, can luxury brands mark their distance and



recreate the gap between luxury and masstige? New luxubrands face similar issues. For example, in the champagmarket, Jay Z’s brand Arnaud de Brignac and MariahCarey’s brand Angel have gained widespread recognition the African American community, due to the activpresence of these two celebrities in the media and on socnetworks. This link offers a challenge to Veuve Clicquochampagne, which has long aimed at a similar audience young, active, female consumers. These new brands attranew consumers who either do not embrace a traditiona

culture or just want to switch away from classic brands.The challenge for luxury brands is to create distancfrom these attractive innovative newcomers. Unlike premium strategy, the luxury difference is not created bproofs but by beliefs. Proofs call for direct comparisowith competitors about the products, the tangible part othe brand, which would entail stepping down from thpedestal and putting the luxury brand at the premiumbrand’s level (Amaldoss and Jain, 2005). Luxury brandcompete instead on their intangibles: they must educaconsumers in order to regain their undisputed symbolauthority, the basis of their price (Karpik and Scott, 2010)To do so, luxury brands must remind consumers of theilegendary roots, the mythical history that sets them aparWhereas celebrities are a form of fashion, luxury cannot bephemeral. Instead, it provides a bridge between the paand the future.



Luxury growth and the rising issue oflegitimization

Luxury has always been more or less morally condemneThe Greek philosopher Aristotle talked about luxury iorder to criticize it, associating it with vice. Centurilater, the Latin writers Seneca and Cicero saw luxury as aearly sign of Roman decline. Today, these criticisms stiexist, latent and sometimes explicit. Even luxury buyetend to feel somewhat uncomfortable with luxury. In thIpsos World Luxury Tracking (WLT) Survey, a globaassessment of the worldwide luxury market conducted bywell-known opinion research institute, the sample orespondents is limited to those persons able to afforluxury goods (eg 2 per cent of the population in China, 5per cent in Europe or the United States). Yet across acountries, more than 60 per cent of these respondentagreed with the statement: ‘living in luxury is a supercilife’ (Ipsos, WLT Survey, Paris, 2013). Although peoplike luxury and sometimes adore it, most share this senof conflict.

In ancient Greece, the moral condemnation of luxur

came from philosophers. Today, it comes from othersources: moralists, politicians and advocates of sustainabdevelopment. Because luxury is an economic sector, wicompanies listed and tracked on international stocexchanges, it is subject to the obligation of permanengrowth (though family companies experience less of th



pressure). Thus, luxury seems to be everywhere today: magazines, in airports and on the high streets of all majocities, as well as in regional cities.

This expansion of luxury may seem shocking emerging economies. In these countries, the majority of tpopulation still lives in poverty, and a minority shows thathey are already well off by consuming expensive gooand brands conspicuously. In a country where 63 per cenlive on less than $1 per day, gures from the researccompany Euromonitor (2012) show that Nigeria had th

fastest-growing rate of champagne consumption in thworld, second only to France, and ahead of several BRInations and mature markets such as the United States.

In 2012, China banned luxury advertising in Beijinwhose streets were formerly ooded with billboardpromoting luxury goods. According to the Chinesauthorities, these ads created a politically unhealthclimate: they were not only too ostentatious but also painful reminder of the wide gap between rich and pooThe ads, and the luxury goods they promoted, representefor many a misuse of public money, incorrect values andbad social ethos. One side effect of this ban was that drove luxury brands to make more use than before odigital and social media, sparking the birth of videwebsites that provide both entertainment and information

If luxury is the smoke, social inequality is the re this controversy. Luxury as a visible economic sector muaddress its collective image and its perceived legitimacjust as all economic sectors must manage their reputation



which determine their right to operate freely. When thireputation is lost, the business is endangered.

Why art now? Becoming an industryThe luxury market’s growing desire to be held as art is nobecause it is art (what is art, after all – it is an endlequestion) but because it needs to be viewed as art, todamore so than ever before. Why? The problems alread

identied are part of the answer. In addition, luxury hasmoved from the idealized family business to that of concentrated, very profitable industry.

Thus far, the luxury sector has thrived on anideological storytelling based on craftsmanship, rarityuniqueness, one-to-one personalization, exclusivitfeelings of privilege and boutiques. The central gure this storytelling is the artisan. Whereas in ancient Greethere was no difference between artists and artisans, sinthe 16th century artists have been considered free of anconstraint (unlike applied arts): they create art for the sakof art, an idealistic search of beauty that reects emotionArtisans master the tekhnè, the art of handmadreproduction of ne objects according to specic knowhow. They must be loyal to a model. Certainly, artisansmust learn how to be creative when lling special orderhow to bring aesthetics and uniqueness to functionproducts for a single client.

Can the iconic image of the artisan survive the reali



of today? Luxury is an industry, and an industry is aboureproduction. In 2009, Louis Vuitton launched a worladvertising campaign called savoir faire (know-howhighlighting the work of the rm’s craftspeople. Such campaign was needed to provide a counterweight to thgrowing image of Louis Vuitton as a mass-produceluxury mega-brand. The United Kingdom’s AdvertisinStandards Agency even banned Louis Vuitton from usintwo of its ads, maintaining that these images misleconsumers into believing that the label’s products we

handmade, when the majority of the bags, wallets another accessories that Louis Vuitton is known for havbeen crafted by machine. Allusions to craftsmanship cathus backfire.

In the past, luxury rms were family businesses, mostlocal, with a focus on the core product. Today, luxury ismanaged by groups, fully global, with a focus on retail ana commitment to expand the brand’s range and diversifythus abandoning rarity and sometimes even relocating (Zegna has factories in Spain, Switzerland, Mexico, Turkeand now China; Prada manufactures in China – a challengfor the magical label ‘made in Italy’). The articatioprocess thus is timely for a sector that is becominincreasingly less artisanal.

A short history of the relationshipbetween art and luxury



Art and luxury have been related since ancient timemoving from close proximity to frontal opposition annow to a renewed collaboration. Historically, there was noart without the support and protection of the powerfuelite: for centuries, in Western civilization, painting waexclusively religious, and its purpose was to diffuse tmessages of Catholicism on the walls of cathedrals anchurches. In an illiterate world, these images were essentfor the celebration of God and the saints. Later, with thRenaissance movement, the Medici family of Floren

stimulated a renewal of the arts and created some distancfrom religious motifs. Seduced by Italy, French KinFrançois I contracted with artists to decorate his palaceand castles. Other aristocrats became eager to bolster thefame and prestige through the development of art.

The 19th century marked an abrupt departure: theadvent of a new conception of art called ‘art for art’sake’, which was devoid of any commercial goal and wia clear desire to be iconoclastic and challenge classic forof art. The movement arguably began with the provocativOlympia by Manet and extended to Picasso’s cubipaintings and other non-gurative contemporary artistsThe notion of an artist changed as well: Van Gogh habecome the symbol of the damned artist, living in povertrefusing the world of money and rejecting the conventionsystem.

Since then, art and money have nourished intricate tieif only in the sense that visionary merchants collectpaintings that critics later recognized as major artwork



which prompted private collectors and museums tcompete for the possession of these unique pieces. It signicant that museums have now become places of maenlightenment – the ‘churches of Sunday afternoon’ whereby art is now consumed by all. This shift indicatthat the status of art itself has drastically changed isociety, such that creation has become endowed witprestige.

Perhaps the most emblematic version of the changinrelationship between artists and money is the life of And

Warhol. He called his studio Andy Warhol Factory,meaning he had no problem with the notion of technicreproduction as art. In addition, he was the rst to identifythe process of artication: when an art gallery exhibitehis painting of a simple Brillo Box, this action bestowthe status of art on his work. Luxury brands have learnethis lesson. Art is that which is consecrated as such binstitutions of art. One of Warhol’s quotes even speciethe opposition between art and money: ‘You know it’s arwhen the cheque clears,’ such that there is someone to pafor it. Subsequent superstars such as Jeff Koons, DamiHirst and Stephen Sprouse similarly have blurred the linbetween art and business. They willingly become part the system, lending their own fame to luxury brands.

What’s in art for luxury?

Because the luxury industry has subsidized art, helpin



artists work, it seems reasonable for the industry to expesomething in return. Art can bring luxury a much needemoral and aesthetic endorsement, non-commerciconnotations and a paradoxical legitimization of its higprices. Artication helps this sector to downplay the socistratification motivation of consumer demand and to fostemore humanistic motivations, such as elevation by objecthat condense highly talented artists’ work, tradition anculture, art and creativity, and timelessness. Thesmotivations justify people’s desire to possess these objec

they want access to beauty and depth, a justicatiowelcomed by this industry. Because art is the apex ohuman activity, associating luxury brands with it can helto sustain the gap between luxury brands and newcompetitors or brands that imitate the codes of luxury. Arreinforces their symbolic authority.

On practical grounds, art and luxury share severacharacteristics. Both are expensive creations and aim at thsame target (the cultural elite). Luxury, like art, aims aimmortality, or at least timelessness. According to OscaWilde: ‘Life is short; art lasts.’ Art value grows with tim(similar to the price of vintage Ferraris). How can aachieve this feat? It does so by being totally independent function. A painting has no literal function, so it caendure the effects of time. Function creates temporaliand a built-in obsolescence; for example, early versions the iPhone no longer have value. The same effect holds trfor fashion, which is invariably of its time and mortal. Fothis reason, luxury must stay out of the fashion realm. Ju



as art has done, luxury must decorrelate price anfunction. Although a handbag remains a bag, as a piece oart its price must be totally independent of its functionThe distance between art and function enhances branextensibility and entry into new categories – thus flimited by associations to specic know-how (Hagtveand Patrick, 2009).

Because most economic growth is created by necompanies and new entrepreneurs, luxury’s growth inecessarily based on new money. However, luxury brand

must anticipate the fast evolution of these buyers. Iaddition, being associated with conspicuous consumptioalienates the creative elite, the inuential consumerpeople designing the future. It is important to demonstrathat the brand does not segment only on the basis omoney but also considers culture, intelligence and thability to value artwork.

How can luxury brands keep extraordinary people loyato the brand? The best answer may be to give them thability to distinguish themselves from other clients of tbrand and demonstrate their capacity to enjoy aestheticalcultural works, which ennobles the money they havThese happy few are quickly moving towards posmaterialistic luxury. They already own Ferraris, dozens oHermès bags, a Rolex Oyster Perpetual, yachts and so on so they have little left to prove. They expect incredibexperiences (eg travel, services); culture, if it is truly ramay also grow in value. Art elevates humankind anmakes the human species unique; it also cannot b



criticized. Art aims for the elite features of all peoplregardless of their wealth – not at a specic elite clacharacterized by its wealth. Finally, art takes people to higher level of meaning.

These traits explain why luxury needs art. Through arand the signature of artists, luxury – criticized fobecoming the science of articial rarity – transformlimited editions into authentic artworks, not mertechniques to create demand. When Louis Vuitton creates €1 million necklace for its new, high-end jewelle

collection, the value is not in the number of diamonds –trite measure of value – but the time and creativitrequired to design and make this piece of art, under thartistic direction of Lorenz Bäumer, one of the worldleading jewellery designers and now the head of LouVuitton’s high-end jewellery line. The artist endows thobject with timelessness, substance, and cultural antemporal thickness: this is ideal for the communication luxury – and is far less supercial than the use ocelebrities.

Ultimately, art is universal. That is, it is an elitislanguage that crosses frontiers. The following sections thexplore the importance of this universality for a brandentry into a new country.

Entering new countries through art

How should luxury brands enter promising new marke



such as China and India? Formerly, luxury brands had aimmediate solution: hire a local agent to import andistribute products. Today’s luxury brands need a longerterm vision. The issue is not simply penetration but settinthe bar high, establishing brand non-comparability anacquiring prestige among inuential consumers. In thsetting, an art exposition may be more effective thaadvertisements in order to demonstrate a brand’s values ocreate links with local cultural elites and opinion leaderThe rst impressions created among opinion leaders in th

country are those that last. Hermès has developed specic approach to be perceived as arriving ‘as a guenot a conqueror’. The brand seeks to avoid an image as predator, only interested in making money by selling higpriced (some would say overpriced) items. Instead, it pahomage to the culture of the hosting country. For exampleHermès entered China by organizing a successfexhibition in the Forbidden City titled ‘Heavenly Horsewhich celebrated the ancient culture of horses in ChinThat Hermès began as a saddle maker and that its logo is horse carriage helped to establish a link. The exhibitioattracted more than 1 million visitors, and Hermès createa bridge between its brand and one of the oldest arts antraditions of China, appealing to the country’s politicacultural and artistic elite. Cartier used a similar approacwhen entering India: it paid tribute to the old and uniquelIndian aristocratic tradition of playing polo witelephants.

Culture is also a bridge between countries. Luxur



brands aim to be recognized not as product makers but aactive elements of the culture and ambassadors for country’s art. Art allows collaboration with foreign artistsThus, Ding Yi, a famous painter from Shanghai, wainvited to create a specic design at a Hermès exhibitio‘Tale of Silk’, held in Beijing in 2008.

A forerunner of artification: Louis Vuitton in Japan

Although in 2014 China is perceived as the centre growth for Louis Vuitton, Chinese consumers are only judiscovering what Japanese white-collar workers found osome 30 years ago, when Japan was the main market foluxury. Louis Vuitton’s Japanese experience summarize

both its past success and future challenges. As the branbecame widely available through an ever-increasinnetwork of directly operated stores and shops-in-shopLouis Vuitton products lost their appeal for Japanesconsumers. In a highly developed country such as Japathe cost of losing the support of the local elite or tastmakers is high. In luxury, success has costs, nameloverdiffusion and overpenetration. As early as 2000, LouVuitton identied a solution for its Japanese marketlaunching an art strategy.

How can art reinforce the brand’s aura and help torenew the customer base? Although no gures docume



contemporary art and contemporary relevance, thesoutward manifestations are unied by one purpose: tendow Coco Chanel with the status of a cultural ico(Heinich and Leduc Browne, 1997).

The process is based not on information but ocelebration. To quote Marshall McLuhan, ‘The medium ithe message.’ To achieve creative credibility, ancredibility based on heritage, it is vital that the brand bpresented in non-commercial settings – national museumare institutions and agents of consecration. In the case o

Coco Chanel, the historical gure herself is not importan– although historians have revealed positive and negatiaspects of her life (eg Vaughn, 2012), reality does noengage people as much as legends. The company’s aim wthe sanctication of the person, a necessary preamble foencouraging people to view the products that Chanecreated as pieces of art (including Chanel N°5) beyond tpurely commercial products of other brands in the markeThese large-scale exhibitions from Paris to Beijing wdesigned to create incomparability and supremacy, tportray Chanel as of a different kind than all followers ithe market. The goal is not to compete on the basis of thproducts themselves but rather to accumulate symbolcapital. To become a cult brand, the luxury brand needs asaint. His or her products become endowed with magiregardless of the number sold, thus releasing the constraicreated by the rarity principle that blocks the growth oluxury brands.

As Heinich and Leduc Browne (1997) rightly point ou



the process of post-mortem transformation is a selfullling prophecy, in that it produces what it claims tacclaim. In other words, if a person is celebrated, it mube that he or she deserves it. Coco Chanel was a greperson because she is admired, not vice versa. Who shreally was is no longer the issue. The queue of people the museums must be the reection of the grandeur of thperson.

Coco Chanel thus is being ‘Chanelized’. While visitithe Beijing exhibition, I was struck by the mise en scèn

the staging of the exposition: huge rooms, all in blacwith such a paucity of objects that even the most trivifelt highly signicant – relics in a silent church. photograph of a stained-glass chapel window not onlreveals that Chanel attended Catholic school but alssuggests a more divine inspiration. The pattern ointerlaced motifs is almost immediately recognizable as tinterlaced Cs of the future Chanel logo. Is it a mystery, oa signal of some kind of predestination? In another rooma book emblazoned with Chanel’s face appears on a shelabelled Queens of France, thus identifying her as aaristocrat of modern taste.

Yesterday in Paris, tomorrow in another major city, the‘N°5 Culture Chanel’ exhibition takes a different tacshowing all the famous artists that Coco Chanel haopportunities to meet. Retroactively, these sculptorspainters and musicians seem to have knighted her, seem have included her in their closed circle, thus transforminher status of seamstress and dressmaker into one of creato



– not of dresses but of works of art. Chanel’s goal is tgrant non-commercial essence to its bestsellers – in thcase to Chanel N°5 perfume.

How artification involves all art institutions

To be credible, the process of artication must involve thinstitutional actors of the art world. They are theambassadors of luxury brands in this process. Consider th

following:• International contemporary art shows, such as FIAC

in Paris and BASEL in Basel and Miami, highlightcollaborations such as when FIAC asked 18 fashiondesigners to collaborate with 18 artists to provide itopening fashion show (1983).

• Art galleries rent out their venues during fashionweeks in New York, London and Paris, among othercities.

• Auction houses are owned by luxury brands. Forexample, Bernard Arnault (CEO of LVMH) boughtthe Tajan and Phillips auction house in 1999;François Pinault, founder of PPR/Kering (Gucci),bought Christie’s in 1998.

• Museums have changed into luxury boutiques. TheGuggenheim organized an Armani exhibition in 200called ‘Exploration of Seminal Designer’s Vision,



With More than 400 Objects’, after receiving a giftof US$15 million from Georgio Armani in 1999.

• In a symmetrical action, boutiques transform intomuseums. Their window panels are designed byartists, and the construction of flagship stores hasbeen assigned to famous international architects whmake audacious, artful statements visible to all,similar to cathedrals and museums in the past.

• The flagship buildings themselves host artisticexhibitions. Luxury brands have also developedtemporary boutiques in unexpected places anddeveloped mobile museums to host and presentartistic discussions of some of their iconic productsor logos, such as the Prada Transformer and ChanelMobile Art Container.

Involving all artists at all levels of thevalue chain

Artication is not a varnish. It is a strategitransformation from the outside in, made possible by

brand’s proximity to artists and their integration in thvalue chain. Artists have collaborated with luxury housefor a long time, though mostly sporadically. The greatesrival to Coco Chanel, the innovative and visionary ElSchiaparelli, a fashion designer from the late 1920s to m1950s, was inuenced by her friends Salvador Dali, Ma



Ray and Marcel Duchamp (Blum, 2003). She in turinuenced the works of Yves Saint Laurent and JohGalliano (Dior), who introduced newspaper prints antrompe l’oeil draping in his collections. In 1965, Yves SaLaurent launched a Mondrian collection and, in 1966, Pop Art collection.

To infuse an art culture in their organizations andcompanies, luxury groups have created foundations anspecial collections. For example, in 1984, Cartier createthe Cartier Foundation for Contemporary Art. In 2005

François Pinault, CEO and founder of Kering Groupestablished his Foundation F Pinault for Modern anContemporary Art, in Venice. In 2014, LVMH opened itsFondation Louis Vuitton pour la Création, designed bFrank Gehry. These classic forms of sponsorship arimportant investments, whereby corporations encouragthe arts while maintaining the independence of artists (sFigure 3.1).

FIGURE 3.1 Artification ladder



Today, collaboration with artists, mostly stars of theavant-garde, has become even more intimate. Luxurbrands have initiated a collaborative stage with artists

who themselves are considered brands – into a de facto cbranding. Thus, as early as 2004, Takashi Murakamicollaborated with Louis Vuitton, and introduced his motifon a limited series of leather bags. In 2008, Louis Vuittoasked Stephen Sprouse to tag a limited collection of bagSimilar collaborations include Yoji Yamamoto for Comm



des Garçons, Robert Combas for Jean Charles dCastelbajac, and Keith Haring for Vivienne Westwood, tname a few.

These examples should not be taken as mere publrelations events, designed by the brands to remaiattractive to the wealthiest consumers and counterbalancthe growth of clients. In a much deeper, more signicanchange, this artication transforms non-art into art – togain depth, elevation and value, and in the meantime tproject old brands into the future in order to ensure thei

respect, if not iconic status, among the creative elite. Thconcept explains why many brands now compete to earthe collaboration of the most audacious artists.

In line with its own discreet culture, Hermès hapreferred to create an ‘Artists’ Residence’ close to thbrand’s ateliers and workshops, to better inuence thartisans themselves and encourage cross-fertilization they work. Here, the hero is not the artist; it remains thproduct.

At the highest stage of collaboration, artists providadvice and input at all levels of value creation: upstream the conception of products, production level and knowhow, and downstream in relation to retail architecturewindow panels, packaging, merchandising ancommunication. For luxury brands, every act must bcreative and rened in order to create a sufcient gapArtication means that every act, including advertisinshould be artful. Some brands even take their inspiratiodirectly from art itself. Thus, the print ad of Secret Garde



from Dior was directly inspired by the famous EdouarManet painting, Le Déjeuner sur l’Herbe. Yves SaiLaurent’s ‘manifesto’ fragrance launch commercial usthe body-painting technique developed by Yves KleiThese artful references are explicit and part of thtransformation of luxury into art. Moreover, recentlyluxury brands have begun to enlist famous directors of thseventh art (movies) to make commercials (eg David Lynfor Lady Dior, Martin Scorsese for Chanel perfume Ble2).

The multiple media of artification

In addition to the media outlets mentioned previouslyartication can be constructed through other media. Retaiis a place where art is to be experienced. Luxury stores anot solely artistic architectural statements; they must albe conceived of as places for an artistic, four-dimensionexperience, both within and outside the store. Today,internet and social media are of foremost importancAlthough the agreement of key opinion leaders must bobtained rst, luxury brands also need to gain the respecof the general public. Luxury brands have become thcurator of content – their own. Educating new generationtoday entails using social media as a way to indoctrinaconsumers into the brand universe and culture. Howevethe process of artication means much more than simpposting rich and exclusive brand content on the man



video websites that attract these new consumers.Events are also a key medium, though they must b

conceived as an artistic, cultural event rather than a publrelations exhibition. For Chanel fashion shows under thdirection of Karl Lagerfeld, the challenge is – with nexpense spared – to produce art at the highest level. Thfour-dimensional sensory experience is not only enjoyed the select few who are invited but also gets immediaterelayed on social media platforms across the world. Thais, media advertising is a necessary part of the articatio

process.Books can also be part of it. Cartier provides aunlimited budget for publishing its own books. Even in thdigital world, masterpieces seemingly cannot be sowithout an accompanying book, whether about the objecitself or the legend of the brand, to commemorate thpurchase experience. The quality of these books guarantethat they are not thrown away but remain as durable arsources.

Conclusion: an ambitious vision forluxury?

Art has become a way to put luxury at the forefront ocontemporaneity, a remarkable feat for brands thatpromote their past as well. Luxury brands have beeelevated as strong cultural conveyors of advanced taste. B



recruiting rising or conrmed stars from the art worldrms can nourish their brand with a ow of inspirationAt a deeper level, they provide luxury with the necessatranscendence that this sector needs in order to overcomthe pitfalls created by irresistible growth.A question thus arises: Does this strategy actualposition luxury as the paragon of human work? It might bthe unspoken goal, accessible by exploiting three majweaknesses of contemporary art. First, it has abandonework as a value and focuses essentially on creatin

experiences for receivers. Formerly, artists had to bexcellent artisans rst, to master the technique and spentime on each piece of art. If work is abandoned by arluxury brands could capitalize on this concept and earconsiderable additional social legitimization. Seconcontemporary art involves provocation, creating a splwith elites, which offers another entryway for luxurbrands. Third, many contemporary artists refuse toennoble ingredients and instead create their art usinleftovers and junk. Luxury brands thus could becomsingular, as the only form of human work that combinecreativity, art, patient craftsmanship and high nobility.

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analysis of social effects, Journal of Marketing Research, 42 (1), pp 30–42Bain & Company (2013) The luxury market 2012, official report, Paris



Benjamin, W ([1936] 2010) The Work of Art in the Age of MechanicalReproduction, Prism Key Press, New York

Blum, DE (2003) Shocking: The art and fashion of Elsa Schiaparelli, YaleUniversity Press, New Haven, CT

Chadha, R and Husband, P (2006) The Cult of the Luxury Brand, NicholasBrealey, London

Clark, T (2007) Starbucked, Little, Brown, New YorkHagtvedt, H and Patrick, VM (2009) The broad embrace of luxury: hedonic

potential as a driver of brand extendibility, Journal of Consumer Psycholog19 (4), pp 608–18

Heinich, N and Leduc Browne, P (1997) The Glory of Van Gogh, PrincetonUniversity Press, Princeton NJ

Ipsos (2013) World Luxury Tracking Survey, ParisKapferer, J-N (2012) Abundant rarity, Business Horizons, 55, pp 453–62Kapferer, J-N and Bastien, V (2012) The Luxury Strategy, Kogan Page, LondKarpik, L and Scott, N (2010) Valuing the Unique, Princeton University Press

Princeton NJThomas, D (2008) Deluxe: How luxury lost its luster, Thorndike Press, New

YorkVaughn, H (2012) Sleeping with the Enemy: Coco Chanel’s secret war, Vintag

Books, New YorkWang, H and Wei, L (2010) The Chinese Dream: The rise of the world’s large

middle class and what it means to you, Create Space Independent PublishinPlatform, New York



PART TWOSpecific issues andchallenges



04Luxury after the crisis

Pro logo or no logo?

This chapter was originally published as an article European Business Review, Sept–Oct 2010, pp 42–46.

The economic recession triggered in 2008 has hit luxuras most other sectors. Many luxury brands have reele

from lack of clients and cash. Since then, many experhave predicted that post-crisis luxury would be of a totaldifferent kind. It was the end of luxury, as we knew it, thend of bling-bling, of prominent logos and high-priexcesses. It is chorused everywhere in the media that thnew luxury will be modest, bespoke. It should be th

demise of conspicuous consumption. It is our argumethat luxury companies would be very cautious in givingfaith to this unanimous and trendy opinion, especially if is backed by cursory polls where respondents tend to givesocially acceptable answers. Based on a deep understandinof the dynamics of luxury and on consumer researc



worldwide, one thing is sure: conspicuousness is here stay, of course with differences within the luxurpopulation. The future belongs to companies whunderstand this need for status and adopt a true luxurystrategy, very different from a premium strategy. Thoswho already did it are the ones that, in fact, grewprofitably during the crisis.

From absolute to relative luxury

Characterized by the ability to spend considerable amounof money beyond what the functional value of producwould command, luxury has always been subject to morcriticism. During the period of economic crisis that begin 2008, the word ‘shame’ has often been used in Westercapitals: anecdotal evidence pointed out that consumevisiting luxury stores wanted their purchases in a blanbag to avoid aunting luxury logotypes in the streets, fofear of moral condemnation.

In a rational world, where the value of things would bsolely tied to their functional utility, there is no room foluxury. But this world would also be asocial. Luxury iintimately tied to the dynamics of living together, to thneed to compare oneself to others, and to the betweenperson competition that is at the heart of economidevelopment in modern capitalism worldwide. This is whconspicuousness is built into luxury behaviour. Howevestill because of social competition dynamics, some grou



need it more than others, up to the point where todifferentiate themselves maximally from the commone(Bourdieu, 1979), elite groups may even ask for vesubdued and subtle forms of ‘brand recognition’, onlrecognizable to an educated few (the ultimate sign of onesuperiority), without logo.

The fact that some critics ask for a no-logo luxury opredict it as a sure outcome of the present economic crisis a sign that the core social function of luxury is stlargely misunderstood. There is no single denition

luxury. Most denitions refer to well-crafted, hedonistiand aesthetic objects, priced excessively above thefunctional utility and sold in exclusive stores deliveripersonal service and unique consumer experience, mooften from a brand with history and heritage – deliveringrare feeling of exclusivity. However, this is more description of what people see or experience, rather than true understanding. What is the difference, for instancebetween premium and super-premium products?

The difference is in the social function of luxuryLuxury is tied to the social hierarchy. Premium goods arjust better goods: they are the best-in-class products, aftexamination of their comparative performance. Luxury elsewhere. No comparison here, except between peopthemselves and their ability to stand out.

Looking back at history, luxury was the privilege anthe signal of the powerful people (gods, semi-gods, kingnobles, aristocrats and so on): they had access to gold, tcastles, to royal pleasures and did not work. They hunte



and engaged in war. Luxury was a measure of your rankitself being inherited. With the French Revolution and thIndustrial Revolution, everyone could in theory gain acceto power with the benets of wealth and of a hedonistilifestyle, surrounded by the most exquisite products froaround the whole world. At the beginning of the 20tcentury signs of luxury were displayed by living inmansion with the latest comforts, driving a car, goinskiing, owning a yacht. No brand was needed at that timethis absolute luxury was by its essence conspicuous, visib

by all. It was visible while walking in the streets of NeYork or London or Paris, or along the wharfs.Now, to foster economic growth in the West, the force

of imitation and self-elevation have been releaseEveryone could hope to buy a part of the great life of therole models, held by the media as icons of our society: thhad money, therefore power and glory. We have enteredinto the modern luxury, a relative luxury – the questiohas, then, become not whether you own a car, but ‘Whacar do you own? A Porsche or a Buick?’ Enter the bran‘Where do you go skiing: Gstaadt or Aspen?’

To summarize, in the aristocratic world, luxury was thson of an inherited social stratication. In our opesocieties, it is the signal of the latent social straticatioThis is why it has gained so much importance. No otheindustry but luxury delivers status to so many peop(universities deliver it, but to a few). But status is a zersum attribute (Bothner, Godart and Lee, 2010) – if you gemore of it, someone else will have less of it. This is why



one really wants to get left behind. Since consumption hbecome an extension of the self (Belk, 1988), status-loadobjects are essential artefacts for impression managemenIn addition, they deliver intrinsic pleasure to the owner ouser. Everyone can build their own prestige vis-à-vis theimmediate social network by having the right objectsignalled by the right brands.

Where is status coming from? From people with thability to deliver status: the elites. What is typical in oumodern world is that there is no longer one single elite:

fact, the evolution of luxury is a reection of the ghbetween elites. Through luxury, elites try to impose theown taste, which is held as superior. The luxury oHollywood stars and sports celebrities is not the luxury othe East Coast WASP, mimicked for mass consumption bRalph Lauren, which is not itself the luxury of younChinese billionaires or Russian oligarchs, drawing behinthem a crowd of emulators, nor the luxury of thbillionaire geeks of the Silicon Valley. Something is certahowever: the need for status calls for well-known anvisible brands. Depending on the reference group of yostatus need, you will choose different brands, known bdifferent people, sometimes by only a few of them.

Modern economies trigger status needs

It is easy to understand why luxury has grown so much our societies, and its future prospects in the BRIC countri



are considerable. Conspicuousness is at the heart of it. I1978, to transform China into a fast-growing economyPrime Minister Deng Xiaoping said: ‘To get rich glorious.’ After decades of communism, of uniformity, oforced and sometimes brutal equality, the forces oindividual competition were unleashed. Everyone counow aim at making more money: no shame. This was evea citizen obligation: glory would be received in returMillions of people have left their villages in China ajoined the megalopolis in search of employment. The

living habits would also be changed: tradition was gone;new man emerged, self-made. The same thing holds true India and Brazil, less so in Russia. Soon it will be Africaturn (it has most of the ores needed by the world). Arecent research has shown, this new urban civilization hstrong implications for status needs. We now live in thmating society. In the BRIC countries as well as in themerging economies, the median age of marriage is goiup. This leaves much more money for self-pleasure anmore time for mating. Janssens et al (2009) as well Griskevicius et al (2007) have demonstrated that meninterest for high-status goods increases in a matinenvironment. The mating perspective encourages men attach greater meaning to displaying success througconspicuous objects. Let us recall that the Chinese luxumarket, soon to be the rst in the world ahead of theUnited States, is predominantly a ‘male’ luxury markeone that is mostly concerned with the race for success.

To paraphrase Chadha and Husband (2006), two other



social phenomena may also breed the world luxury feveWe live in storytelling societies. But the fairy tales are noabout people just like us who became celebrities and riquite fast. This proximity creates identication: so manwebsites and blogs tell us how these people dress and whthey eat now that they are rich and famous. It has beeshown by Mandel, Petrova and Cialdini (2006) thareading about a successful person who is just like ones(for instance, coming from the same school) increasconsumer expectations about their own future wealth

which in turn increases their desire for luxury brands. Lus remember that, in all countries, new magazines whether they be in paper format or digital – now tell u‘who are the richest’ and ‘who are America’s richest belo40’. This increases the materialistic values of peopexposed to such repetitive stories.

Finally, in this race there will be more losers thawinners. In a factory or in an ofce, only the chiefs are power. Most workers feel a state of powerlessness: thehave no control over others. Rucker and Galinsky (2008have shown that people try to compensate for this, trestore power by acquiring high-status objects, ‘especialif the products’ status is visibly conspicuous’. Thoverspending is a placebo to restore a sense of power and, we would add, of dignity. One should never forgethat in Confucianist Chinese society reputation and facsaving are of paramount importance. We can probablyextend this to other countries too, where money tends tbecome the key evaluator of people’s worth.



Adapting the price and logo to differentsegments

The luxury industry no longer means an industry that accessible to only a niche of the richest people. While stfocused on this group with regard to yachts, private jetexclusive trips in the Atacama Desert, and living in a fulecological, sustainable and zero CO2 resort, BernardArnault, founder CEO of LVMH – the world number-on

luxury group with more than 60 brands – summarizemodern luxury as: ‘The ordinary of extraordinary peopland the extraordinary of ordinary people.’ This sentence at the heart of the luxury strategy. Luxury brands needboth targets to thrive. When they lack one of them there a problem: too few extraordinary people means that soothe brand will have to trade down its prices: it has lost istatus-giving clients. It has no other solution than to pacelebrities to aunt its products: a sign of weaknesHaving too few ‘ordinary people’ may also limit the dreaof the brand by lack of visibility. Investments imegastores also need to bring new clients into thetemples.

However, the status needs of different segments are nothe same. People who already have richness and statuhave little to prove. They draw no glory from exhibitintheir wealth. In fact, they compare themselves only to thepeers. They like brands known by them only (PatePhilippe instead of Rolex), just as they like to patroniz



golf clubs where the entry fee is so high that it sets upsocial barrier. If they buy an expensive Louis Vuitton baor suitcase it is because they recognize it is a precioobject. They have the freedom to choose for themselveunlike most of us who choose with others in mind. Thespeople will like brands that hide their logo, beinrecognized only by their typical pattern or design: Bottega Veneta is. This means that only those in the knoware able to identify what you wear.

People with less status but a lot of money are cravin

for status. They buy visible status. A recent research (JHan, Nunes and Drèze, 2010) conrmed that thepreference for pre-eminent logos was totally predicted these two factors: richness and status. In addition, theshow that a third group (with less money but a high neefor status) was also looking for big logos. This is the targof Ralph Lauren’s recently launched big pony polos (withsuper-large logo on the chest). No surprise, this group also the core target of counterfeited products. The essencof the counterfeit industry is to sell very visible logos low-quality products. This group is not looking for durable product, but a fast class.

Luxury brands grow by catering to different segmenof people. To take one of the world’s most famous luxurybrands, Louis Vuitton, it must manage the logo sensitivitof its different client groups. Louis Vuitton uses a dustrategy:

• Introducing expensive new product lines to capitaliz



on the need for uniqueness of some people, called‘snobs’ by Amaldoss and Jain (2005). Snobs are thopeople whose utility from a product decreases asmore people exhibit it.

• Varying the logo pre-eminence: in fact, the moreexpensive a bag is to buy, the less pre-eminent thelogo. And vice versa. Nunes, Drèze and Jee Han(2010) showed that, on Louis Vuitton e-commerceboutique, one incremental unit of logo discreetnesscost US$26. For Gucci it was more expensive: $122

The same holds true for Mercedes-Benz: the logo onan A Class has a 16-centimetre diameter; on an SClass it is 6 centimetres. Nunes, Drèze and Jee Hanmade a statistical regression analysis and found thateach 1 centimetre reduction cost US$5,000 more forthe client.

Why conspicuousness will come back: itnever left!

We have demonstrated that the forces drivin

conspicuousness have never been so strong in luxury higgrowth countries. What about the Western world? Therumour mill keeps on repeating that logos should now bdiscreet. Conspicuousness is out. There are three problemwith this prediction. The rst is that it is trendy. In fact iis the kind of answer that one nds in typical survey



where people are interviewed on whether or not ‘luxurlogos are overly visible and their size should be reductoday’. The answer is typically a socially acceptable othat we would expect today. Interestingly, Han, Suk andChung (2008) have compared negative opinions about thsize of luxury logos and subsequent luxury purchases: thfound that people’s preferences in ‘non logo-exposeproducts did not correlate with actual purchases!

Still another recent study run in the United Statelooked at the gamut of bags presented between 2008 an

2009 on the websites for Gucci and Louis Vuitton (the twmost protable luxury brands) and compared them witthe highest brand equity as measured by Interbrand (2010The authors (Jee Han, Nunes and Drèze, 2010) make thassumption that such companies are well managed anthat their new products and new prices are introduced tmatch the consumer demand. During the apex of the 200economic crisis in the United States, new producintroduced displayed the logo much more than producthat were withdrawn. In addition, all prices went upFinancial results of the US branch of PPR (now callKering) and LVMH indicate that this strategy wabenecial. The crisis has wiped out of the stores those whcould only buy the most accessible products, just like thcheapest Porsches lost half of their sales in 2008. But tluxury clients have not lost their need to signal statuThey are the core target of the luxury brands.



Back to luxury?

Dealing with the future of luxury, the problem is that a loof opinions are held and believed not because they agrounded on research or on facts but because they arrepeated by everyone, just like rumours.

Two researchers launched the slogan of ‘inconspicuouconsumption’ (Granot and Brashear, 2007). They call it th‘populence paradigm’ (popular opulence) because involves the mass production and distribution of premiugoods and services, enabling the majority of consumers pick and choose their consumption of New Luxurbrands’. Interestingly these authors use the term ‘premiugoods’, thus overlooking the fundamental differenbetween a luxury strategy and a premium strategy (alscalled trading-up strategy). Luxury exists because som

people cannot access it. Since richness is growieverywhere in the world, thanks to fast economic growthluxury must never be made too accessible if it wants remain the dream of those with growing revenues anwealth. Even when made accessible its pricing should discriminatory. As a consequence, most of the brands thlike to call themselves luxury are not in fact followingluxury strategy. They are more driven by a fashiobusiness model. It is noticeable that the brand that mosfollows a luxury strategy, Hermès, is also the mosprotable of the sector (Tabatoni and Kapferer, 2010) andthat which grew by 8.5 per cent throughout the economi



crisis.

ReferencesAmaldoss, W and Jain, S (2005) Conspicuous consumption and sophisticated

thinking, Management Science, 51 (10), pp 35–45Belk, RW (1988) Possessions and the extended self, Journal of Consumer

Research, 15 (Sept), pp 139–68Bothner, MS, Godart, FC and Lee, W (2010) What is social status? Industrial

and Corporate Change, Summer 2010Bourdieu, P (1979) La Distinction: Critique sociale du jugement, Editions de

Minuit, ParisChadha, R and Husband, P (2006) The Cult of the Luxury Brand: Inside Asia’s

love affair with luxury, Nicholas Brealey, LondonGranot, E and Brashear, T (2007) From luxury to populence: inconspicuous

consumption, ACR Proceedings, Memphis Conference, 35, pp 991–92Griskevicius, V et al (2007) Blatant benevolence and conspicuous consumptio

when romantic motives elicit strategic costly signals, Journal of Personalitand Social Psychology, 93, pp 85–102

Han, J-M, Suk, H-J and Chung, K-W (2008) The influence of logo exposure inpurchasing counterfeit luxury goods, DMI Conference, Essec, Cergy-Pontoise, France, 14–15 April

anssens, K et al (2009) Can buy me love: how mating cues influence men’sinterest in high status consumer goods, working paper 2009/570, GentUniversity, School of Economics and Management

ee Han, Y, Nunes, J and Drèze, X (2010) Signaling status with luxury goods:the role of brand prominence, Journal of Marketing, 74 (4), pp 15–30

Kapferer, J-N and Bastien, V (2009) The Luxury Strategy: Break the rules of marketing to build luxury brands, Kogan Page, London

Mandel, N, Petrova, PK and Cialdini, RB (2006) Images of success and thepreference for luxury brands, Journal of Consumer Psychology, 16 (1), pp57–69

Nunes, J, Drèze, X and Jee Han, Y (2010) Consumption in a recession: toning down or turning it up, Journal of Marketing



Rucker, DD and Galinsky, AD (2008) Desire to acquire: powerlessness andcompensatory consumption, Journal of Consumer Research, 35 (August), p257–67

Tabatoni, O and Kapferer, J-N (2010) Are luxury brands really a financialdream?, HEC Paris, Research Paper, July



05Why luxury should notdelocalizeA critique of a growingtendency

This chapter was originally published as an article European Business Review, March–April 2012, pp 58–62

Many famous luxury brands have recently planned tdelocalize their production. For a long time ithad beenrumoured that some luxury brands produce productsoutside their home countries, but this had rarely beenconrmed ofcially. Such recent public announcements aretherefore a new and important development. For example,Prada recently acknowledged that some of its goods aremade outside Italy, in China, thus joining Burberry, whichlong ago closed its historical factory in Treorchy, Walesdelocalizing to China and Mexico. Many applaud luxury



difficult to find any indication of the country of productiowithin a Lancel bag. The same is true for many Repettshoes. Kenzo, an LVMH brand, moved the production osome clothes from Prouvy, France to Krakow, Polandwhere workers’ wages were one-fth of those paid France (Korosylov, 2007). Nevertheless, the clothes westill priced as high as before. Armani Exchange cardigaare made in Egypt and Tunisia.

Coach, however, has never hidden the fact that a largpart of its production is delocalized. The same is true fo

Polo Ralph Lauren. More recently, Burberry’s turnaroundhas been accompanied by the closure of its Wales-basefactory, due to a belief that producing clothes in the UKdoes not create perceived value for a fashion brand. Hencstarting in 2006, Burberry delocalized all but its trenccoat to China, Mexico and other countries with low laboucosts. In 2011 Prada, a very high-end fashion label, decidnot only to manufacture in China, but also to announcthis change publicly. This new communication strategy signicant of a new era. Thus far, many Italian brandhave used and abused the right to use the ‘made in Italytag as long as the product – although manufactureelsewhere – was ‘nalized’ in Italy. Thus, the etiquet‘made in Italy’ does not at all guarantee that the product actually made in Italy.

What, then, motivated the public announcement bPrada, stating that: ‘About 20 percent of Prada’scollections – which range from bags and shoes to clothfor men and women – are made in China’ (reported in th



Wall Street Journal on 24 June 2011)? This must bunderstood within Prada’s nancial context. The companwas pressed to seduce Asian investors, a few days befoits IPO in Hong Kong on 27 June 2011.

Now, the real question remains: should luxury branddelocalize or not? To provide an answer to this questiorequires that we first clarify what is meant by luxury.

Luxury: do not confuse the concept, the

sector and the business modelEveryone implicitly understands what luxury is, when otalks about the concept. Certainly no two persons have thsame denition of what is their own luxury, but the sharedconcept of luxury refers to ‘rare, hedonic, very high-quali

objects and services, sold at a price far beyond what thefunctional value would command, source of self-rewaand of image lift vis-à-vis some relevant others’ (Kapfer1998). In fact, as shown by Bataille (Bataille and Hurle1991), it is by sacricing a high sum of money to pay mothan the functional benets are worth that the buyerdemonstrate their status and reinforce their own selconcept.

However, the word ‘luxury’ also has a second meaningIt can be used to refer to an economic sector. When Bai& Company value the world luxury market at around €1.billion, they perform this calculation by summing th



revenues of companies regarded as luxury not by the publat large but by syndicated organizations. For instance, iFrance, Comité Colbert acts like a self-appointed cluonly those allowed to register in this club are regarded luxury companies. The same holds true for Altagamma Italy. For personal reasons, some Italian companies havdecided not to join Altagamma, although they woulcertainly qualify. On the contrary, Lacoste, the Frenchoutdoor, chic, ready-to-wear company is a member oComité Colbert, but very few persons would use the wor

luxury to dene Lacoste or its core product – the famoupolo shirt – regardless of its high quality.There is also a third meaning of the word ‘luxury’.

can be used to refer to a unique business model, a specistrategy with exacting and stringent rules to be followe(Kapferer and Bastien, 2009). This latter acceptance interesting, because any company may enact a luxurstrategy, even if the company is totally outside thcommon understanding of the kind of companies thacomprise the luxury sector (fragrance, clothing, leathewatches, jewellery, accessories and so on). For instancApple, MINI, Nespresso and even Lacoste more or lefollow a luxury strategy, even though these companies arnot perceived as ‘luxurious’ by the general public.The fact that ‘luxury’ can have each of these thremeanings is a source of much confusion. Since the wo‘luxury’ is fashionable, its use is largely abused, especiaby companies that do not in fact follow the rules of thluxury strategy. Coach, for instance, introduces its hom



page with a bold headline, ‘The look of luxury’, therebacknowledging that, although it has an appearance oluxury, it is not a real luxury product. Going one stepfurther, one can say that it is because luxury is a sectordriven by obligations of growth and protability, thamany of its co-opted members have no other choice than delocalize their production. They rationalize it by invokinthe excellent quality of the work now done in China, buthe real reason for this delocalization is that they cannogrow and increase their protability by raising their reta

prices. Instead, they are increasing their protability breducing their cost of goods. On the luxury businesmodel, one grows by continuously raising the averagprice. This is the only way for a brand to keep on being thdream of the wealthy and of all those consumers whalthough not as wealthy, want to buy a part of theformer’s lifestyle. But this business model is exactinMany companies cannot follow it any more and prefer tdiscontinue a luxury strategy, without saying it explicitlyin favour of another business model, for instance that ofashion or of premium brands.

Luxury brand building is about buildingincomparability

The luxury business model aims at creatinincomparability, which grants freedom to set one’s ow



prices. In contrast, on all other business models, prices aset while taking the competition’s prices into account.

How does one create incomparability and the pricinsensitivity that follows? Incomparability is created moving away from tangible elements of comparison anfocusing on concepts such as art and religion – intangiblthat elevate people.

Certainly, incomparability should also have a rationabasis. Luxury brands put forth their rare ingredients, rarproduction, the unique talents of the brand’s craftspeople

the time it takes one person to sew a Kelly bag, or the timthat a Royal Salute whisky stays in the barrel (21 yeaminimum). But the economics of singularities (Karpik aScott, 2010) that apply to famous Bordeaux châteauwines as well as to management consultancy prices amostly due to the uniqueness and desire created bintangibles. The two major intangibles are time anprovenance. That date of birth, heritage and legend are onessence of luxury is acknowledged by the relentless attemby many recent brands to simulate it. Thus, Ralph Laureis very successful in making everyone forget that it isrecently invented lifestyle brand (1968), the fruit of business genius named Ralph Lifshitz. The whoatmosphere within Ralph Lauren’s agship stores and thmany black and white photographs on the walls ardesigned to create the illusion of a brand that alreadexisted at the time of The Great Gatsby, Cary Grant anthe early Hollywood golden era. This halo of privileged lis leveraged to sell the Polo Ralph Lauren line at



premium price, even though much of it is made in China low cost. Nevertheless, these products are sold in agshstores that look like mansions in the hearts of the worldcapital cities.

Provenance is the second strong intangible pillar luxury desire, for it builds uniqueness, mystery, magic annon-comparability, and adds cachet. One should not forgethat luxury is the by-product of art. Gifts are an importanpart of the luxury market. This is remotely reminiscent othe exchange of objects of art between the emperor o

China and the kings of France and Italy. Luxury was thambassador of the country from which it came. Iepitomized its culture and demonstrated the abilities of imost highly valued craftspeople. For wine, the soil is alpart of the uniqueness. To merit the title ‘champagne’ wine must be made 100 per cent in the Champagne regioOtherwise, it is called sekt in Germany, sparkling wine iAustralia, spumante in Italy, and so on.

There are very few exceptions to this rule oprovenance. Does one imagine Ferraris made elsewhethan in Maranello? After buying the MINI brand, eveBMW decided to keep its factory in the UK although would have been much more rational to delocalize it Germany. One may immediately object that Audis armade in China. Indeed, this is why the brand has becomso prestigious there. Communist Party high ofcials anot allowed to buy cars that are not produced in ChinaBut Audi does not follow a luxury business model. Thsingle proof is that they do not limit their production, sale



and market share. The same holds true today foMercedes. At Porsche, a key motto until recently was t‘always supply one car less than demand’, implying thvolume maximization was not the goal. However, since itakeover by Volkswagen Group, the brand has announcedhigh growth objectives: from 97,000 cars in 2010 t200,000 in 2018. This will be achieved through thintroduction of new models designed to attract newsegments of buyers into the brand universe, and taccelerate the penetration of high-growth countrie

focusing rst on China. This is why the hypothesis ohaving one of these new Porsches made in a Chinese plahas been overtly evoked by Porsche management anuary 2011. The vehicle would be a mini Cayenne, calle

Porsche Cajun, to be produced along with the Audi Q5Clearly, high growth perspectives create productiocapacity bottlenecks and lead the company to question thtaboo of delocalization. In any case, the Boxter anCaiman are already made in Finland. New models could bmanufactured closer to targeted markets. As an additionabenet, local production of some new Porsche model India would reduce the customs taxes in that country from113 per cent to 40 per cent.

Another exception to the rule of provenance is whethe homeland is not linked to an added value, or to specic perceived skill. This is why Chanel or LouVuitton watches are made in Switzerland, but in their owexclusive factories. They are not outsourced or made undlicence. Similarly, if Hermès wants to launch a new shaw



• developing brand awareness well beyond the coretarget;

• always increasing average prices;

• strong involvement with arts;• beware of celebrities.

This business model was empirically invented by tholuxury brands that today are icons of the world’s desir(Louis Vuitton, Hermès, Chanel, Ferrari, etc). Thesbrands grow by continually launching higher products higher in creativity, quality and price. Porsche’turnaround in the 1980s was achieved by the deletion othe many accessible lines (924, 944). Remember, producare perceived as luxury specically because some peopcannot access them. Products for which this rule is not mshould not be called luxury products, but rather premium

stylish products, for instance, or designer brands or masprestige.Today, everyone can see the multiplication of accessib

goods sold by so-called luxury brands. It is normal for luxury brand to create an access door to its universe, tinduce consumers to trade up (Silverstein, Fiske anButman, 2008). Even Boucheron jewellery house does and Cartier. The problem arises when the so-called luxurbrand can only grow and be protable by sellinaccessories, mostly licences. It means that the brand has, fact, discontinued the luxury business model, whicontinuing to leverage its halo of luxury image (inherit



from a past fame) to sell fashionable accessories, producat low cost in some emerging country.

Let’s now turn to the fashion business model. It itotally different for one very good reason. What doefashion sell? The answer: just being … fashionable. Thsimple insight commands the entire fashion productiodistribution and marketing strategy. After two or threemonths, today’s fashion won’t be fashionable any more. Aa result, the prices will need to be slashed so that the shopget rid of their inventory and can be ready to showcase th

forthcoming collection. In order to maintain high margindespite the necessity to engage in sales, followed by supsales in factory outlets, there is only one solution: to lowthe cost of production as much as possible and try to seat the highest possible prices at the beginning of thseason. In any case, once a cloth is out of fashion it is nused any more. It does not need lasting quality (unlike thof luxury, since luxury is here to last). This is why Coachas always acknowledged being made in China. VictorKarasik (a US business lawyer) in a nancial report shareholders of Coach (2011) is very explicit about thCoach business model (fashion): ‘In addition, Coach hvery high margins, even relative to its competitors. Even “luxury” competitors such as Moet Hennessy LouVuitton and Hermes, who charge signicantly higheprices than Coach does, don’t have as high a gross margas Coach.’ This means that what former Coach CEO LewFrankfort calls ‘accessible luxury’ for selling purposesnot a luxury strategy at all. As the nancial analys



remarks, the goal is to maximize the gross margin, bmanufacturing the products at the lowest possible cosThis is normal. On the fashion business model, one lives a fragile time: being fashionable does not last. Thus, thpast, the heritage and the legends are not important. Nor ithe country of origin. However, the designer is – or thstrong values held and promoted by the brand (such aDiesel jeans, which brought high fashion into the jeansector).

T h e premium business model is based on th

manufacturing of best-in-class products, with an image style. If there is a best in class, it means that it is possibto make some kind of objective comparison betweecompetitors. In fact, the premium strategy is based omanufacturing skills. It forces respect by increasing tfunctionalities of the product beyond what was thinkabbeforehand, such as the car that slows down when thhand’s grip on the driving wheel is softened, as a sign driver drowsiness. The whole car industry is engaged this premium business model. Another example is thskincare sector, in which the ever-increasing claims of skprotection and rejuvenation made in the advertising of necreams and elixirs must legally be justied by scientievidence. On this business model, time, heritage and evprovenance are not important: proof is what is important.

To summarize the argument, Miuccia Prada recentlsaid (Wall Street Journal, 24 June 2011): ‘brands need teconomise and look for manufacturing territories that offthe best deal, but to also weigh up the consumer respons



to a luxury brand’s source and place of origin’. This is clear statement, admitting that the Prada brand nowdenes its strategy according to consumers’ own tradoffs, just as a mass-market brand. But, in fact, what dconsumers think about this?

The consumer opinion on delocalization

Asia is the future of the luxury market, because of i

booming economies. It is, therefore, interesting to look recent research undertaken in the BRIC countries as well in Japan, which was the former number-one market foluxury and is still very high. In interviews with 1,50luxury buyers in Japan in 2009, McKinsey asked wheththey agreed with the following sentence: ‘I do not cawhether luxury goods are made in low-cost countries sucas China, India, Vietnam, so long as they are genuinelfrom luxury brands.’ Only 14 per cent agreed. This meanthat 86 per cent of Japanese luxury buyers think thaluxury brands should not delocalize to countries with lolabour costs.

Ipsos, a global market research company, asked anothequestion of luxury buyers in six so-called emergincountries in 2010: ‘A brand ts more with my idea of luxury when it is made in my country versus in a Westercountry.’ The answers ranged from 1 (my country) to 6 (is a Western brand) with intermediate gradecorresponding to mixed or in-between opinions. Th



average answers by country are as follows: Russia 6; SouKorea 5.8; Brazil 5.4; China 5.4; Hong Kong 5.3; Ind3.8. Interestingly, in ve cases out of six, luxurimmediately evokes a product from another country, anspecically from Western countries (France, Italy anGermany – for cars too).

One should not overlook the role of travel in thgrowth of the luxury market. In 2010, according to Bain &Company, total luxury sales in all of China were smallethan total luxury sales in New York city alone. However

purchases made by Chinese travelling abroad represent much as the Chinese internal market luxury sales. Whethe Chinese travel to Paris, for instance, they visit thEiffel Tower and the Louvre Museum and then rush tLouis Vuitton’s agship store on the Champs-Élysées. Thwill bring back a luxury gift from that famous brandbought in the Parisian store (which increases the perceivvalue of the gift), like a trophy. They cannot imaginbuying in Paris something that is in reality made next doto them, in China, by someone like them.

The above-mentioned studies did not ask the samquestions of fashion brands or mass-prestige. We can guethat the answers would have been different. Asking for lemoney, these brands do not need to deliver as much addevalue. Luxury is special. It is the highest form oconsumption, in which all the sources of added value amobilized to produce the desire of something that is nnecessary, making it compulsory: both tangible anintangible added values. Behind the luxury brand there



A second group of companies emphasizes the creatistyle only, much inspired by the fashion business modeThus, Burberry’s former CEO Angela Ahrendts defendethe company’s decision to close its British factory follows: being made in the UK is not a strategic factor build consumer preference for the brand, which is mostbased on fashion and British style, not on specic Britimanufacturing know-how, unlike some French and Italialuxury brands.

As a result, for this group of companies, the question o

‘made in’ is an empirical one: if there is no differencethe look and feel of the product, consumer satisfaction then guaranteed in any case. Since it is less costly manufacture in China, it is rational – from a manageriastandpoint – to delocalize. They are advocates of thintangible economy, following Michael Porter’s thesis othe competitive advantages of nations, in which the Wewould specialize in what it does best (creativity, design amarketing), leaving production to emerging countries thwill quickly learn how to match the quality level of formlocal producers of luxury brands (Porter, 1998). TakingApple as a benchmark, although almost everything in aiPhone is made either in China or in South Korea, a labon every box reminds consumers that the product wa‘designed by Apple in California’. In this way, thcompany harvests fame and prots by virtue of being thone who conceived and designed this wonder tool. Thuthis segment does not emphasize the phrase ‘made in’ brather ‘designed in’ or ‘designed by brand X’ – or does n



emphasize any such particular phrase at all. As one retailhas said: ‘When a consumer buys Chanel, he/she buyFrance at the same time, so why add a tag on the clotwith “made in France” written on it? To do so would besuperfluous.’This raises a question about the specicity of luxurmanagement. First, delocalization diffuses the, thus faunique country know-how, thereby destroying levers oadded value. It is also the best way to reinforce futurcompetition, not to speak of counterfeits. It is highl

signicant that in June 2011 Apple decided to sue its masupplier for the iPhone, the Korean giant Samsung, ogrounds of breaking patents and counterfeiting. Withouany doubt, Samsung’s Galaxy phone and pad look vermuch like the iPhone and iPad. More structurallydelocalization provides these Western brands with acceto higher volumes of production, and hence the ability tcapture fast-growing consumer demand in Asia, Russia anBrazil, without limits. Implicitly, this means that luxury a business just like others, aimed at value creation anshareholder satisfaction (Kapferer and Tabatoni, 2012)We are very far from the philosophy of Hermèsepitomized by CEO Patrick Thomas: ‘When one of ouproducts gets too successful, we stop it.’ This philosophy surely not unrelated to the remarkable protability of thiluxury brand (its prot in 2014 was 32 per cent of salesThe luxury dream is precisely based on the fact that it another world, far from all the principles governing thsuccess of global brands made everywhere in the world a



selling just an image to as many people as possible: NikAdidas and even Ralph Lauren, Hugo Boss, TommHilger, Gant, etc. The latter are often called luxury,because the word ‘luxury’ sells, but they are actualpremium stylish brands, if words and business models aseriously to mean something.

The consequence of this latter vision is that ‘made imust be defended. Otherwise, it will lose its value. A rconsequence is legal. The bar must be set very high allow the right to use the certication of origin (‘made in

In Italy, many companies want to avoid this. Thus far‘made in Italy’ has been accessible to brands that simpassembled the nal product in Italy. Yet mere origin is noenough. Respect for a tradition of working methods toshould be compulsory and checked. This is to put an end what has been called ‘Made in Chinitaly’, referring to thmany sweat shops installed in Italy itself, using Chineworkers who entered the country fraudulently and are paiat Chinese labour market prices. Interestingly, these sweshops – Chinese factories installed undergound in Italymanufacture both for high fashion brands and focounterfeiters.

Most importantly, defending the ‘made in’ means thathis phrase itself should be managed as a full brand, witboth its tangible and intangible sources of added valuAdvocates of delocalization hold that ‘made in’ as a meindication of origin of production has become meaninglein our modern times in which products are, in fact, madin a collaborative way, involving many countrie



Europe, thus providing a big bonus to the shareholdersince the retail price of the luxury product is exactly thsame regardless of the country in which it is made. addition, delocalizing appears to be the best short-termanswer to the post-economic crisis, fast-growing demanfor luxury goods in the world. In fact, delocalizatioentails often abandoning handmade local production bcraftspeople to be replaced instead by efcient machinerThus, delocalization is a blessing from an immedianancial perspective. But are shareholders the managers

the luxury brands, as they are for most consumer goods oeven mass-prestige brands? Of course not. As long as thremain independent, non-listed, family companies, thehave a long-term vision that precludes falling into the traof short-term benets. What is at stake is the ability fotrue luxury companies to remain so distinctive – and thsource of an exclusive, long-lasting desire.

ReferencesBain and Company (2011) Luxury in 2011, Bain World Reports, MilanBataille, G and Hurley, R (1991) The Accursed Share, Zone Publishing

Company, New YorkIpsos (2011) World Luxury Tracking Survey, ParisKapferer, J-N (1998) Why are we seduced by luxury brands?, The Journal of

Brand Management, 4 (4), pp 251–60Kapferer, J-N and Bastien, V (2009) The Luxury Strategy, Kogan Page, Lond

and New YorkKapferer, J-N and Tabatoni, O (2012) Is luxury really a financial dream?, HEC

Research Report, HEC Paris



Karpik, L and Scott, N (2010) Valuing the Unique: The economics of singularities, Princeton University Press, Princeton NJ

Korosylov, I (2007) What the luxury profession thinks of country of origin?Research paper, 2007–01, ICN, University of Nancy 2, France

McKinsey (2009) Luxury in Japan, research reportPorter, M (1998) The Competitive Advantage of Nations, Free Press, New YoSilverstein, M, Fiske, N and Butman, J (2008) Trading Up, Portfolio Trade, Ne

YorkThomas, D (2007) Deluxe: How luxury lost its luster, Penguin Books, New Yo



06Internet and luxury

Under-adopted or ill-adapted?

The internet creates a paradigm shift as big as thintroduction of printing in the 15th century. Therelationship between luxury brands and the internet imarked by a double myopia: luxury brands may be toconservative but the internet advocates may also be shorsighted when urging the luxury industry to conform to thgeneralized norms and movements of the web and socinetworks. On the web, luxury ceases to beevident. Alsothe internet has not been created for luxury niche

companies, but for large-scale brands and operations. Thepurpose of this chapter is not to summarize the discussionson luxury growth challenges on the internet but rather toexplore in depth some new facets of the issue and topresent recent advances.



The new frontier of luxury

Since the emergence of the worldwide web, the luxusector’s relationship with it has been rather cautious andsome might even say, conservative or fearful. High speand fast expansion are the main characteristics of thinternet: everything changes so fast. To keep abreast of athe changes taking place, everyone needs to be a geek,digital expert. Thus, a culture shock arose for the luxurindustry, which tends to think long term, typically doenot act under the pressure of time, and is mostly concernewith the sustainability of brand reputation and the dreamof ownership, a key factor in its pricing power. Even morthe risks are not the same for brands that market handbagat US$1,000 and those that start at €5,000.

Fundamentally, the internet breaks the barriers of tim

and space, two essential pillars of the luxury creation ovalue: luxury needs time to be produced, accessepurchased and delivered. For example, a customer cannojust enter a Ferrari store and leave with a brand-new carBuying a Ferrari, or even a Hermès Kelly bag for thmatter, is associated with an extended selling ceremonthat may take a year in the rst case and months in thsecond. With regard to the negation of space, the internechallenges stores in all industrial and service sectors. Bluxury brands tend to view themselves as religions and, such, their cults need temples without which there is nreligious initiation or ritual (Dion and Arnould, 2011)



Luxury also connotes a mythical space, a land of origiwhich is often the country in which products are made. Asuch, they are endowed with both a unique local knowhow (Swiss watches, for example) and the magic spirit the holy place of origin (eg Paris).Another facet of the chasm between the internet cultuand luxury is the fundamental antinomy between the kevalues of the net – especially since web 2.0 (open spatransparency, collaboration, horizontality, proximity, nocontrol) – and the essence of luxury (relativ

inaccessibility, distance, control), without which luxurcannot achieve its ontological function of elevation and sociological function of social stratication. This is whthe net has given birth to new actors in the luxury sectomostly new distributors (eg Net-a-Porter.com, VentePrivée.com), whose core function is to open the doors increase the accessibility to luxury brands, due to the nebusiness models allowed by online commerce. However, be able to continue distributing luxury goods in the futurbrands must rst remain highly desirable. In essence, thwhole luxury sector will continue to thrive if it cacontinue to build and sustain luxury brands that makpeople dream, not so much among the people o‘yesterday’ but among the people of ‘today’ an‘tomorrow’ – baby boomers and Generations X and (Briones and Casper, 2014).

Indeed, new generations are another facet of the culturshock between the internet and the luxury industry. Thgrowth of the latter since the 1980s has been moulded b

http://xn--vente-privcom-kp16b/

http://net-a-porter.com/



the demands of the baby boomers of the world, especialWesterners. In terms of the industry’s future, in Asia thparameters are quite different: 80 per cent of new luxurconsumers are mostly younger than 40 years of agFurthermore, they seem to be more connected than theWestern counterparts: a visit to Seoul or any capital oprovincial city in China proves this immediately. Thcertainly does not mean that luxury brands should targeall social networks there, but in these countries and fothis new sophisticated target market, technology mean

edge and relevance in today’s vocabulary, not to mentiothe creation of value through online services. However, thextent of engagement in e-commerce activities remains issue for luxury brands that want to prevent being negateon the altar of modernity.

Thus, the purpose of this chapter is not to summarizthe discussion on luxury challenges (see also Chapter 1), books have been devoted to this topic (Okonkwo, 2010Kapferer and Bastien, 2012), but rather, as already statedto explore in depth some new facets of the issue and present recent advances.

Luxury and the internet: a reciprocalmyopia

The relationship between luxury brands and the web anits main actors is marked by a double myopia: luxur



sector. In its present conguration, the web is noadaptable to luxury: it was created not for luxury brandbut for mass brands. Under the inuence of its AngloSaxon tropism, the key words of the web includscalability, big data, millions of fans, and so on. The golmedallists of the web are judged by their numbers. Whicis the most searched brand of leather bag on the webWhich brand has the most fans on Facebook or WeChat iChina? Whose site has the most visitors? Which rmcarried out the most buzz campaigns on the web? This a

mimics Hollywood heroes or gladiators, personied bCharlton Heston or Kirk Douglas, exing their muscles timpress the crowd of spectators. This net is not at atailored for niche actors – in fact, it does not care abouthem. Fuelled by the considerable enthusiasm for thpossibilities of the internet, web advocates and new higtech solution providers have exerted a techno-push oluxury brand general managers. They all sing the samsong: embrace the web wholeheartedly, without anrestriction, or die!

In doing so, however, they help the web to act as thTrojan horse entering the luxury sector. That is, unless thluxury sector can transform the web, the risks are higthat the web will instead dilute the sector and the luxurdream. It is time to realize that beyond the fantastic abiliof the web to diffuse brand content, thus contributing tbuilding the dream of luxury brands among millions onew consumers around the world, rms need to defenluxury against the web in some of its underacknowledg



facets as well. Although the visible side of the web hmany values, the immersed side of the web also needs to unveiled for luxury general managers. The issues are ntechnical but strategic.

Revisiting the potentialities of the web

What is a luxury general manager mostly concerned abouFirst, they do not want to miss the revolution of the web

As such, many general managers spend weeks in Californto gain full immersion into Silicon Valley and to talk wiCEOs to grasp the future of the web. A second concern the loss of competitiveness of their brands as luxury bran(not masstige brands); that is, their distinctiveness comfrom their ability to create class, to be a class. Thirdmanagers fear a loss of control. And they are right. Thweb is full of both potentialities and dangers, makinbrands more vulnerable.

Regarding the potentialities, the web is rst a grearecruiting tool. What would have taken months, if noyears, for luxury start-ups to accomplish can be accelerattoday through the web. These start-ups can build branawareness – without which there would be no brand poweand, thus, no dream – much faster. Recall the structurafactors weighing on the dream, as measured in the ‘dreamequation’ (Kapferer and Valette-Florence, 2014):

Luxury dream = –7.0 +.3 Brand Awareness +.6 Herita



–.4 Penetration

The luxury dream is a positive function of both branawareness and the perception of heritage/history, and

negative function of diffusion. The net is not so much vehicle for the diffusion of products as a lever of branpower and education about the brand culture, its traditionand its history. As a sign of the times, today luxury brancommunications are no longer written, but mostlprovided through videos. There are two main reasons fothis:

1 Dreams are made of images, so the production ovideos and their circulation on the web are the mosefcient ways to educate consumers and unveil thbrand story, history and culture.

2 Data indicate that what travels the farthest on thweb are videos of all kinds, as long as they have high emotional power (e-motion). This is why thweb has cultivated the new notion of brand conten(Bo and Guevel, 2014).

Without brand content there is no brand. Brand content i

not a sales pitch about one of the products in the portfoliorather, it is what brands say, show and propose when theystop talking about their product features. To be circulatedon the web and in social networks, this content must binformative, entertaining, exploratory and participativeThus, brand content should aim to nurture the brand



culture, anything that will make it non-comparable and source of aspiration. Brand content is at the heart otoday’s luxury brand communications; it is no longer thfourth cover page in some glossy magazines. Naturallbrand content goes beyond the web, but because all is weeven an exhibition about Mademoiselle Chanel at thMuseum of Contemporary Art in Beijing, or in thForbidden City for Cartier, will also be accessible througthe web.

With regard to the negative side of brand content, th

challenging question is how much to ‘feed’ the web, wiits voracious desire for new information. Can luxurbrands transform themselves in new ways to satisfy thinsatiable appetite of the web and its fans? For luxury, lesis more. The power of diffusion through social networks such that it affects the perennial codes of luxurcommunication itself. The typical luxury communicationnot about shouting and fads. However, the growth of thecelebrity factor in the luxury market may be due to thneed to invent news: ‘Let’s talk about what Kate Moss wearing today!’

Today, fashion shows and défilés are also directlavailable on mobile phones and pads. Some brands, such Burberry, allow consumers to dive into the show, pick up product to analyse it in 3D, and order it immediately, thutransforming the immediacy of the desire into actiofostered by the knowledge that the products in the showare in rare quantity. This process capitalizes on anarticially based chrono-rarity. The digital strategy o



Burberry has indeed been the key pillar of the brand buzit has generated much public relations and admiration noonly from analysts but also from the internet industry anthe new, tech-savvy consumers. These consumers artypically Asian consumers from Seoul, Tokyo, Shanghai Chengdu, who tend to rely more than others on socianetworks and generated buzz to learn what is hot and coo(Ipsos, 2013). Thus, over time the luxury sector has movedangerously closer to the fashion sector, in which articirarity and ephemerality are the rule, time is short, an

immediacy of fullling desires is the business goal. Thisin contrast with luxury brands’ goals of creating lastinand exceptional products and enhancing people’s livthrough quality, style and art.

Another strong potentiality of the web is servicIndeed, the weak spot of most luxury brands today is stiservice. Note that when consumers – even afuent onesare asked what traits dene luxury (see Chapter 1, Tabl1.1), ‘having excellent service’ never ranks high in thlist, except of course in the hospitality business (Perey aMeyer, 2013). Conversely, when they are asked anothekey question, such as ‘Without such a trait, is the branstill a luxury brand?’ service excellence ranks much high(Brovot and Kapferer, 2014). It is well known that thinternet can enhance consumer satisfaction and evedelight by answering some basic questions raised, such a‘Where can I nd that product?’ ‘In what particular storeand ‘Do they carry my size?’ Of course, the internet wnot be able to give the answer if the supply chain itself h



not been endowed with an IT system. Most luxury anfashion brands – even well-known ones – are not yet abto provide this basic information, though some do. Thosthat do are excelling at what is called web-to-storstrategy; instead of pitting online and ofine against eacother, they maximize their interactions. Service is norestricted to ofine, of course; it can also be enhanced bhotline platforms that help stores that themselves are oftetoo busy solve problems; some even provide a dedicatexpert on the products. This is what Approche Sur Mesur

invented. Paradoxically, this company was created in thlate 1990s by a general manager of the skincare division one of the most famous luxury brands, after he left thcompany. He decided to propose to his former employewhat he had been missing during decades while at the heof the division: a CRM system that enabled clients in neof answers to some specic questions (eg ‘What are thstore hours?’ ‘How can I use this cream?’) to directcontact the luxury brand. The role of this platform habeen extended to e-retail and has been fullinternationalized. Now experts may wonder if skincare still a luxury activity or a masstige one, considering thway that mass retailers – such as Sephora or Douglas market this product. In any case, clients themselves sttend to perceive these brands as luxury brands.

In terms of loyalty, the web proves to be a greamotivator for clients, the fans: it allows them to engagwith the brand and, in return, to bring their own conten(their own stories) to the brand. More strategically, th



web allows brands to move up the commitment ramp iterms of creating the strategic community of branconnoisseurs (Atkin, 2014). Many people confuscommunity and social networking, but connoisseurs armore than fans who just say they ‘like’ something oFacebook, in the hopes of beneting from some latdiscount. Connoisseurs want to interact with similar otheand engage in an exclusive relationship with the brand anits spokespeople. Managing this community worldwidmeans leveraging members’ innovativeness, eliciting th

will to share their own stories and exchange within thcommunity, and also proposing special restricted eventhat reward them for being real connoisseurs, not simplfans.

When considering e-business for luxury brands thfollowing questions should be considered:

• How far should a firm go?• Should it sell the full range of products or only a

few?• What is the relationship of e-business to the bricks-

and-mortar stores?

There are no straight answers to these questions; rathethey are part of the strategy of each brand. Selling on thinternet is, at minimum, a sure way to make known to apotential buyers that there is an authorized e-supplier oauthentic goods of the brand. Otherwise, the door is widopen for the myriad, unauthorized e-retailers to sourc



products on the grey market (eg counterfeits). On 17 Ju2014, LVMH and eBay settled their long-lasting dispuafter LVMH, the world’s number-one luxury group, suedeBay for being the main platform to allow unrestricteaccess to counterfeit products of its brands. The fact thaLVMH needed to go to court to win the case demonstratehow much the founders of the internet tend to discount thneeds of the luxury sector. For these founders, access tcounterfeits is not an issue in a world of freedom. Thuthey negated the patents and copyright and trademark law

that forbid production and distribution of counterfeigoods. Why would what is forbidden in bricks-and-mortastores be authorized on the internet by virtue of itdedication to a deregulated and free-exchange world?

The inescapable necessity of the web as a source of business for luxury brands is due to another cause: thskyrocketing price of rentals for bricks-and-mortar storeLuxury is an urban business. Where there is trafc, therare also tourists. Paris has 154 luxury brands, London 12and Milan 85. But stores have a cost and, in 2014, thaverage annual rental rate per square metre waUS$24,938 in Hong Kong, $20,702 in New York, $15,000on the Champs-Élysées, $8,666 on Bond Street in Londoand $8,152 in Ginza, Tokyo. These rents make it very hardto make money: how much does a store need to generate terms of sales to be protable in light of these rates? Thleads to another major question: How can brands get morpeople into their stores? There is a tactical answer to thrising costs of rentals and to the need to get people into th



store – pop-up stores. Pop-up stores do the opposite obricks-and-mortar stores by actually pushing new productowards luxury clients. To bring more people into agshistores, the role of the internet as a web-to-store tool habecome even more necessary. Another answer to thprotability question is to consider that sales can also takplace after the visit to the store. Time is an essentidimension of luxury, as the production of partly handmadproducts takes time. So too does their purchase. That ispurchase of an iconic product can wait – as long as th

brand has built a lasting desire through, for example, delightful store visit.Visits to bricks-and-mortar stores are not alway

delightful experiences, however. Consider, for example, Chinese tourist who, with just two and a half days tspend in Paris, must buy at the Champs-Élysées LouVuitton store a long list of specic products to bring bacto friends in China, with the signature of the ‘holy’ storIt is time to question the quality of these Chinese touristpurchasing experience while the bus is waiting outside tstore. Can brands still talk about the luxury experience ithis case? Or, rather, could pre-purchase lists sent on thweb be a better way to make purchasing more fluid?

Clouds over the internet: the loss ofcontrol



The essence of a luxury strategy is control. This is whtrue luxury brands buy back their production anddistribution licences. Doing so is the only way to mastquality along the entire value chain, from the crocodile python farm to the store experience. The growth odirectly operated stores (DOS) echoes the same neeexcellence in stores denes their quality and high standarwithin the brands’ selective distribution network. Selectidistribution is like pregnancy; there is no such thing being half pregnant. A store must be very exacting or n

at all. This is true for bricks-and-mortar wholesale circuias well as e-retailers’ authorized sites, which need to scanned on the grid of quantitative and qualitative criter(see Derville and Kapferer, 2014). For many e-retailerselling luxury brands means discounting them for a limittime: on the internet, such brands become a good deaThis is clearly a practice that needs to be regulated by thluxury brand selection grid.

One understated function of retail stores for luxurbrands is their ability to select clients. Certainly luxubrands are rather discriminatory: they target clients whare likely to be able to afford such luxury. Analysis oafuent clients’ perceptions of 60 brands reveals thselectivity is essential for the perception of the brand as‘luxury brand’ (for more details, see Chapter 1, Figure 1.p 24). Luxury stores select their quarter, their street, thside of that street. They act as lters: entering is like a riof passage, access to another world. These symbolic accebarriers are disappearing on the internet: anyone can ente



jumping with a simple click from Zara to Chanel and fromGap to Gucci, consequently destroying the symbolfrontiers between them. Opening a website is like openina store in a street that no one knows.

Another facet of the loss of control pertains to thmessages. On the web, luxury brands – due to the diffusioof their messages – lose the monopoly they previously haThe web is a playing eld for sharing by the people whuse it, thus putting an end to the old broadcasting topdown model. Consumers now want to engage i

conversations with brands, bottom up or peer to peerBrands should respond to this demand but also maintaidistance; otherwise, the luxury brand becomes just anothpal or best friend and, over time, loses part of its sacreand distant nature that sustains the dream in the longterm.

Still more problematic on the internet is the loss control of luxury brand clients, if not their data. For weadulators, it is a great feat for a luxury brand to have 1million fans on Facebook, but the less acknowledged paof the story is that these fans do not belong to the brandbut to Facebook, whose business model is to make theaccessible to competitors, for example, renting out LVMHclients to Burberry. Recall that a key facet of the luxurstrategy (Kapferer and Bastien, 2012) is the one-to-oncontact, the sense of privacy and the intimacy that gowith luxury relationships.

Although the web is presented as the domain ofreedom and happiness, the fact is that four major actor



now make the law: Google, Apple, Facebook and Amazo(or GAFA). Their quasi monopoly is the source of thepower. They dene the conditions of usage of their servic– that is, of the web. Thus, it is true that thecompetitiveness of luxury brands is endangered bFacebook because Facebook can provide the fans of anbrand to competitors. The luxury brand does not ‘own’ itfans any more: they are for sale. It is no longer scienction to predict that someday a big data agent will havbuilt the database containing all the luxury buyers of th

country. When such a case happens, what will the brand’power be? Another concern is if the GAFA privatizcookies, the little spies that identify everyone. But does tluxury clientele want to be tracked? Do they waneveryone to know what they do? Maybe Nike’s or Zara’or Ralph Lauren’s clients do not care, but what abouMaserati’s or Chanel’s?

The issue of the control of data is one of privacy oweto rms’ own clients. This was true as long as they visitethe boutiques, but on the web the laws of privacy are madby those who control the web, not by the luxury brands othe consumers themselves. Such privacy issues will call a reaction, such as the European Economic Communilaws, which in 2013 mandated that Google comply with person’s right to be forgotten (erasing past negativinformation from web memory).

Another type of loss of control was recentlexperienced by wine companies when they realized that tnew generic top-level domains (gTLDs) such as dot-w



companies, to manage their CRM, with direct applicationon mobile phones or on the internet. AmEx acts also as thCRM of many luxury brands because elite clients pay wiAmEx, thus procuring remarkable access to these clienThis means that the frontier between CRM and media becoming fuzzy and also that the key principle of a luxustrategy – to know the client one-on-one – may no longbe possible through these data providers. The new actoron the web do not try to qualify people individually but bthe millions. The task of building individually based CRM

remains to be done by the luxury brands themselves.

Adapting the luxury organization to theweb

As a famous proverb states, when you live close to the seinstead of building a big wall you better learn how tswim. It is high time for luxury companies to learn how swim. The digitalization of society clearly raises questioabout power and organization. Should there be a digitaofcer on the company board? Is digital dependent omarketing, or vice versa? How can barony silos (PR on onside, media on another side, web on a third side) be eraseat a time when digital has become transverse? How cafirms persuade people to work together?



Rethinking the word ‘communication’

Today, communication means the web, not justadvertising. Luxury brands should devote time tanswering questions about the web rather than discussinthe next advertising page. Because the web is the mediuof all media, all company actors should work together anabandon their silos. Let’s recognize the reality – clients aomni-channel. They live on the web, read less, and favouoriginal visual and sensory experiences. Luxucommunication must express the creativity of the houacross all the channels, not one in particular. Tradition inot an excuse for laziness or over-conservatism. The oldthe brand, the more its creativity can be bold. Consideagain Dom Perignon, whose name is that of the Christiamonk who, according to the legend, invented champagn

As early as 1961 it broke the rules of a conventionchampagne communication by sponsoring James Bond, that time regarded as the ultimate sex symbol.

Transforming the organization to

adapt to digital If digital is de facto the medium of all media, the digitofcer of web operations should be integrated into thcomex and even possibly become the head ocommunications. For example, it is notable that the digit



direction at Hermès is situated close to the room whermythical Kelly bags are made. Chanel now employs digiartistic directors, who are well aware of its culture and cahire both outside and inside talent for a digital campaign.

In the same vein, bricks-and-mortar stores, the web ane-commerce are not enemies but rather should be managsynergistically. The stores themselves can provide 3Denhanced digitalized experiences (to try products on, attend private showings, to choose a car). The web is thbest preparation to making a visit to brands’ sacred plac

that are still called stores. Without stores, the brand rituathat accompanies visits, the design of brand-speciservices, and a large part of the symbolic and intangibdimensions of luxury will be missing.

Transforming the web to adapt to luxury

The internet was not created for luxury but for big brandsbig numbers. As a result, luxury will need to carve iinternet presence to regain control of its image, its clienits destiny. The fundamentals of luxury cannot just babandoned because of technology. For example, luxury distance, but the web destroys distance. The questiobecomes how to recreate distance between the brand anits clients. This does not mean never answering thequeries. In fact, Chanel innovated by creating the rst cacentre for its skincare and make-up lines. By consideriservice, caring for clients and treating them as VIPs, luxu



brands should be protective of the intimacy of thesclients. To do so, perhaps luxury stores will need to gai100 per cent security by being non-traceable through wior by disabling cookies. Isn’t that what luxury’exceptional clients expect?In conclusion, luxury brands must dene their owdigital strategy if they want to gain differentiation anposition themselves as true luxury brands, not as masstigor premium brands. A major facet of luxury brands is thequilibrium between presence and absence. Unlike Coc

Cola, for example, which needs to be present everywherat hand’s reach, luxury brands need to be absent – nooverly visible – in order to build their reputations as raand a privilege. So far luxury expansion has been made bopening more doors in new cities. Today there is strategic discussion about reducing this number, whicmeans closing boutiques. Actually, in 2013 those thacommand the highest prestige in China are also those withe smallest number of stores (Chanel 10; Dior 20; Herm21; Prada 27; Louis Vuitton 47; Gucci 58). Now and in thfuture, they will need to process the internet in the samway. Rather than creating presence everywhere, absence the key. When the brand is present, it must dictate its owconditions. After all, Rolex expects the lion’s share ospace in any jeweller authorized to sell its brand. Thshould be expected of e-retailers as well. If Hermès invein e-commerce, it should be exclusively in its owterritory – dot-hermès. Luxury brands need to re-fragmenthe web for their own profit.



ReferencesAtkin, D (2014) All together now: the new and vital strategy of community, jn

The Definitive Book of Branding, ed K Kompella, Sage Publications,

Thousand Oaks, CABo, D and Guevel, M (2014) Brand Culture, Googtime editionsBriones, E and Casper, G (2014) La génération Y et le luxe, Dunod, ParisBrovot, F and Kapferer, J-N (2014) The Kernel of Luxury, unpublished researc

paper, HEC ParisDerville, X and Kapferer, J-N (2014) Selective distribution, unpublished work

paperDion, D and Arnould, E (2011) Retail luxury strategy: assembling charisma

through art and magic, Journal of Retailing, 87 (4), pp 502–20Ipsos (2013) World Luxury Tracking Survey, ParisKapferer, J-N and Bastien, V (2012) The Luxury Strategy, Kogan-Page, LondKapferer, J-N and Valette-Florence, P (2014) Levers of the luxury dream, pap

presented at the INSEEC/International University of Monaco first LuxurySymposium, Monte-Carlo, April

Okonkwo, U (2010) Luxury On-Line: Style, systems, strategies, PalgraveMacmillan, City State

Perey, E and Meyer, L (2013) Luxury Attitude, Maxima, Paris



07Does luxury have a minimumprice?An exploratory study intoconsumers’ psychology of

luxury prices

This chapter was originally published as an article ournal of Revenue and Pricing Management, 13, pp 2–11,2014, co-authored with C Klippert and L Leproux.

C onsumer studies show that luxury evokes high prices.However, the remarkable growth of this sector is based onits extension to the middle class, with affordable priceThis is a paradox: luxury needs to be expensive, yet thsector grew by being accessible. Hence the question: consumers want access to luxury, below what price woulthey consider that it is no longer luxury? Is there



minimum price? This chapter explores how consumedecode luxury prices; how lower prices are compatibwith luxury; and how strong brands have more latitude foaccessible pricing than new luxury brands.

The elusive luxury definition

Although luxury shops are everywhere in our modern citiand online, there is still no consensus about the denitio

of luxury. In short, luxury refers to rare, hedonic objectand experiences beyond the necessities of life, therefoaffordable mostly to those who have surplus money. Sucdenition is subjective: for some people Ralph Lauren luxury, for others it is not rare enough. It is not thepurpose of this chapter to address this elusive question denition, for luxury is a relative and cultural concepfluid and changing (Yeoman, 2011). The word luxus comfrom Latin but etymologists disagree as to its root: is excess or standing apart? Luxus has no equivalent iapanese nor in Chinese. This is why Japanese people spe

of ‘lugujuri’ (phonetic adaptation of lu-xu-ry). They refnot to the concept but to what they experience in the storeof prestige brands anywhere in the world.Another denitional difculty is that people confuse concept and a conception. Thus the luxury creators – thbrands – emphasize such facets as exceptional qualitcraftsmanship, handmade, rarity, noble ingredientsmaintaining tradition, and so on. The luxury buyers ten



to speak of their sense of exclusivity, hedonism, access rare quality and to authenticity and experiences (Yeomaand McMahon-Beattie, 2010). Finally, the majority – thnon-buyers – equate luxury with conspicuousness, excewaste: they underestimate the product, paying no attentioto craftsmanship.

A recent research (De Barnier, Falcy and ValetteFlorence, 2012) factor analysed three main scales used measure luxury (Dubois and Laurent, 1998; Kapfere1998; Vigneron and Johnson, 1999). They converge bu

each one measures some specic factors. Thus luxury cabe identified by six dimensions:

• a very qualitative hedonistic experience or productmade to last;

• at a price that exceeds what functional valuescommand;

• tied to heritage, know-how and culture;• available in restricted and controlled distribution;• offered with highly personalized services;• acting as a social stratifier, giving a sense of

privilege.

As shown by Kapferer and Bastien (2012: 47) these criteare necessary but their weight differs according to thsector (service versus product, automobiles versus clothinetc). They capture the two facets of luxury: for onese(reward) and for others (appearance, sign of power).



Price and luxury

Despite the elusive nature of luxury, consumers anprofessionals converge on one point: price is part of thdenition. Bain, the expert world consultancy on luxurydenes it as ‘premium products sold in premium stores a premium price’. Kapferer and Bastien (2012) have showthat luxury is not just more of premium. The price opremium goods needs to be justied by objective facabout quality. In luxury, quality is assumed and the pricedoes not have to be explained rationally: it is the price the intangibles (history, legend, prestige of the brand). ISeth Godin’s blog (17 May 2009) he echoes this kedistinction by quoting luxury as being ‘needlessexpensive’. US wine professionals (Castaldi, Cholette aFrederick, 2005) classify wines according to price: popul

and medium ($7 to $10), mid-premium ($10 to $14ultra-premium ($14 to $25), luxury ($25 to $50) and supeluxury ($50 to $100). Those wines still more expensive acalled ‘icons’. Since an icon is a xed religious gure, thimplies that such prices have no rational basis but insteaa spiritual one.

Recent international consumer studies point out the kerole of price in the categorization of anything as luxuriou(Godey, 2013). Being ‘expensive’ is the rst criterion fqualifying luxury in Japan, the second in France, the thirin China and Germany. These results are not surprisingHistorically, luxury has been the lifestyle of th



aristocracy, and later the wealthy bourgeoisie (Veblen1899). The modern evocations of luxury retain from thhistory feelings of exclusivity, exceptional qualitcraftsmanship, uniqueness, noble ingredients, rarityhedonism, art and prestige – today attached to those whcan afford this lifestyle by their own success. In fact, in tsame study ‘exclusivity’ is the number-one criterion fdening luxury in the United States, Germany and Italand the number three in Japan.

The rate of growth of the luxury sector since 1995

remarkable. The personal luxury products marke(watches, jewellery, leather goods, clothing, fragrance anskincare) has grown from €77 billion in 1995 to €21billion in 2013 (Bain, 2014). This steady growth has beepossible because luxury has become ‘the ordinary of thextraordinary people and the extraordinary of the ordinarpeople’. Once limited to high-net-worth individuals wimore than $1 million in cash (Capgemini, 2012), luxurmade the dream accessible to the middle class an‘excursionists’ (Dubois and Laurent 1996) who buy ononce a year. Most of the luxury buyers are not ‘rich’. Aarticle published in Harvard Business Review, ‘Luxury fthe masses’ (Silverstein and Fiske, 2005), identies how accessible ‘new luxury’ has allowed the masses to trade uNew luxury refers to luxury brands’ downward extension(Chanel make-up or skincare), to premium goods (GreGoose vodka or Callaway golf clubs) and masstigproducts (Victoria’s Secret, Polo Ralph Lauren). In thchapter, however, the concern is specifically luxury brand



(2005) demonstrated that luxury prices are subject texternalities effects. People called ‘snobs’ are ready to pmore for a product if the effect of this price increase is reduce the number of ‘conformists’ also buying thproduct. ‘Conformists’ are people who buy because thewant to look like aspirational people. If snobs exhibit typical Veblen effect (demand grows when prices increasconformists follow the classical law of price elasticidemand grows when prices go down. Hence the success luxury trading down. Becker’s (1991) analysis o

restaurant pricing shows that, unlike what classicaeconomics recommends, a successful premium restaurashould not increase its price to the point where demanequates supply – for there would be no more waiting lisIn luxury, one keeps supply below demand; obstacles tpurchase increase perceived value. Allsop’s (2005) analyof premium pricing shows how higher price creatdesirability: not only as a signal of quality, but as measure of one’s ability to afford it. Luxury is a way oshowing both to oneself and to others (the two facets oluxury) that one can pay the price of luxury that iextravagant from a rational standpoint, such as a $1,500Château Latour Bordeaux. For economists, luxury pricinis discriminatory pricing: it aims at eliminating consumewho cannot follow (Groth and McDaniel, 1993).

This literature is mostly focused on the attractiveness high prices. Here, however, we address a symmetrical onwhere does luxury price stop?

Marketing literature on price psychology (Mazumda



Raj and Sinha, 2005) proposes the concept of referenprice: consumers would estimate that a product iexpensive on the basis of a price stored in their memorcoming from their last purchase experiences with the samproduct class. In luxury, however, unlike fast-movinconsumer goods (FMCG), purchases are infrequent. Alson the internet, famous luxury brands restrict the diffusioof information about price: one must ask for it. Howeverwe cannot discard the idea that, through personal inquiror social media interaction, typical prices circulate abo

the hot items of the season.Our specific research questions are:

• What psychological processes intervene in definingthe minimum price of luxury?

• What are the relative roles of tangibles andintangibles in these processes?

• How do price and brands interact in these processes?Can brands trump the price?

• What individual differences play a role indetermining the luxury price threshold?

These questions have academic and managerial relevancTo understand a phenomenon one should analyse it at itfrontiers. To get at the essence of luxury, identify the partthat can be played down and those that are quintessentialshould one study Rolls-Royce or borderline cases? Frommanagerial perspective, the reality is that luxury brands,



order to grow, will have to recruit newcomers. Analysis oconsumers’ reactions to luxury lowered prices will insightful.

To address the research questions, an exploratory studwas set up: 150 questionnaires were sent in March 2013 tparents, friends and relatives of MBA students at HEParis, an elite school. Of these, 110 were received back: 6per cent from female buyers, 67 per cent between 20 an30 years old, 54 per cent declaring annual revenues abov€27,000, 34 per cent above €60,000, and 54 per cen

saying they buy luxury goods two or three times a year.The questionnaire ran as follows:

• Under what price do you estimate that (a ring) is notluxury?

• In your mind, what is the typical price of a(Mauboussin ring/Ralph Lauren shirt)? Would yousay it is luxury?

• If Dior decided to reduce their prices on an item by50 per cent would it still be luxury? Why?

• For you, can a very well done counterfeit be luxury?For instance, a superb copy of a Louis Vuitton bagsold at €200 instead of €2,500?

• Finally, what justifies for you the high price of aluxury product?

The products used with the questions varied according gender (for instance, rings for females, watches for men



We used Mauboussin jeweller and Ralph Lauren as brandbecause their luxury status is debated, as shown by IpsoWorld Luxury Survey (2012). Mauboussin is a historicprestigious jeweller who – to avoid going out of businessunderwent a complete turnaround and is now selling avery accessible prices, and advertising on TV to widaudiences. This strategy is worldwide. We used Hermèand Louis Vuitton as typical luxury brands: according tIpsos they are among the most spontaneously quoteluxury brands in the world.

We also included a follow-up qualitative part to thsurvey: eight actual luxury buyers were interviewed depth in Paris. After discussing their last luxury purchaseand what luxury was for them, the interviewer addressethe central question of the minimum price in a givecategory. Then we asked the interviewees if sales ansuper-sales or websites selling luxury goods at a discouprice (such as Net-a-Porter) were still luxury. Thperception of counterfeits was also checked. Finally, sinmany luxury brands buy some of their products from smacraftspeople, would buying directly from the craftspersonof course at a reduced price – qualify as a luxurexperience?

Results and insights

Since luxury is a cultural notion we do not claim that thresults are generalizable worldwide. This is the case for a



Tiffany is a famous American jeweller with a prestigioheritage starting in 1837. In the early 1990s the branlaunched an accessible siver line at $110 called ‘Return Tiffany’. It was a success, attracting many young people the brand. But it hurt the feeling of exclusivity and dreaattached to Tiffany. In 2007 they increased the price from$110 to $175. The Wall Street Journal wrote: ‘Fashiovictim: to refurbish its image, Tiffany risks prots. Aftsilver took off, jeweller raises prices to discourage teen

(10 January 2007: A1).TABLE 7.1 Luxury minimum price

Below what price would you say a ring is not luxury? €1130

At what price would you say a luxury ring starts? €1983

At $110 did these young buyers perceive it as luxurAs shown in Table 7.2, using Mauboussin’s presentrading-down strategy, we asked what is the typical pricof their rings and if they are ‘luxury’.

The perceived average price of a Mauboussin rin(€1,213) falls just within the no man’s land identie

above. The lower quoted price is €150, the higher pric€7,000. Actually, Mauboussin rings extend from €400 to€24,000.

Results show no systematic link between the averaprice quoted by an interviewee and their perception of sua ring as luxury or not. Some consumers declare €300 a



Is it luxury ? NO 40%

TABLE 7.3 Would a 50% price reduction hurt luxury?

If Dior reduces the price of an item by 50%

it remains luxury 45%

it is no longer luxury 55%

There is a split of half in the answers given in Tab

7.3. The reasons invoked by those who say that this is stiluxury are:

• First comes the brand strength. Dior has been asynonym of luxury for decades. It shaped whatluxury means. Whatever it does remains luxury. Aquote from the interviews is insightful: ‘Diorproducts are not luxury because of their price. Thefact that it is luxury has nothing to do with price.’However, they voice a little restriction: in the shortterm, despite the price drop, Dior remains Dior,therefore luxury. If it were to be repeated, doubtscould arise: ‘Is the brand admitting it is now weaker

it has lost some prestige?’ There is a risk of brandequity dilution.• The second reason is that the product remains

unchanged with the same amount of work,crafsmanship, service too.



Counterfeit is still luxury 6%

Counterfeit is not luxury 94%

Is a superb Louis Vuitton counterfeit luxury?

Today, counterfeits offer excellent copies of luxurproducts at a much reduced price. It is luxury madaccessible. But is it perceived as luxury? See Table 7.4.Among the 110 persons interviewed seven declared thif it is a great copy – that no one can identify as such then counterfeits are luxury. What are their reasons? Sincluxury has two facets, luxury for oneself and luxury foothers, those people value more strongly the second on

They pursue a social adjustment goal (Wilcoz, Kim anSen, 2009), valuing the logo more than the product. Whethe counterfeit cannot be identied by others, ‘it remainluxury because others do perceive it as such’.

The majority of those interviewed (94 per cent) do nconsider counterfeits as luxury because:

• For tangible reasons: equivalence of quality is denieeither on an a priori basis or with rationalizations(‘the ingredients are not as noble’, ‘the design is lesrefined’, ‘a connoisseur will identify it’).

• All the other reasons rely on intangibles as the sourc



of value of luxury:– The pleasure of owning an original, the authentic

versus the copy, however perfect the latter mightbe.

– The defence of intellectual rights. Copying is bydefinition far less valuable, at least in the Westernworld, which holds innovation and creativity asimportant values.

– Counterfeit products have no umbilical link withthe tradition, the history, the savoir faire of arenowned luxury house. They are just products,made by anonymous workers in poor conditions,not objects created by revered artisans pursuing avery long tradition of excellence.

– The buying experience is miles away from luxuryEven when one buys a small-ticket item in aHermès store, the experience is luxurious.Counterfeits are bought in the back of shops, fastas if the cops might arrive soon. As a result,counterfeits evoke negative feelings tied to fraudand deception – and the object is desacralized.Luxury brands, on the contrary, sacralize their

products, which are held as icons, sold in temples(the flagship stores) and revered as art andheritage or the legacy of a worshipped creator.

– There is a lack of pride when buying a counterfeiBy owning a fraudulent product one cannotsymbolically enter the meritocratic club of person



who can afford the price on their own merit andhard work.

Is buying directly from a craftsperson luxury?

In the qualitative interviews, we presented the case ofnew brand creating a rare crafted product. These productattracted the attention of a famous luxury brand whoincorporated them in its own offering. For instanceNorlha – founded in 2007 – produces textures with uniquyak bres, processed by hand by nomads living on thTibetan plateaux. They are now sold by Hermès, toounder its own label. Would buying directly at the nomadscamp or factory still be luxury?

One clear conclusion emerges. Buying directly fromcraftsperson or at a luxury brand store are two differenexperiences: one is not above the other. However, onlbrand creates luxury. Quotes speak for themselves: ‘If buy it directly from the craftsperson, this remaincraftsmanship: just a nice product with nice quality, madby nice people, surely something rare too but not luxureither.’ ‘A jewel bought from a craftsperson is nice but noluxurious: buying it at Cartier brings you into anotheworld.’ The brand creates trust and condence: it elevatethe product to the level of luxury.



What justifies the high price of luxury products?

How do consumers justify the high price of a luxurproduct? What values do they identify in judging this prito be fair?

Unsurprisingly, among the 110 collected answerquality is quoted 47 times. An extraordinary quality iwhat most justies a signicant price difference wiproducts fulfilling the same function:

• Quality refers to the ingredients (27 collectedanswers), how they are selected, from what countrythey come, their ‘nobility’.

• Quality is experiential. Luxury pricing hassimilarities with the placebo effect (Carmon andAriely, 2005) – one quote expresses this effect: ‘Wehad parties with cheaper wines, but had less fun.’

• Quality refers to the work itself, its complexity, theknow-how, handmade, the amount of time spent tocreate one single product. These dimensions of quality guarantee exceptional durability andreliability.

• Quality concerns the persons involved: luxury brandhire talents, not workforces. For some intervieweesthey are even artists. Everyone in a luxury house(creators, designers, seamstress, etc) is highlyqualified: they justify extra costs.



the precondition for the luxury magic to operate(Dion and Arnould, 2011): magic happens whenobjects transmit supernatural forces onto theirowner. To transfer onto oneself the prestige of thebrand one must pay the price. The higher theprestige, the higher this price: ‘in fact one does notbuy a Louis Vuitton bag, one buys the right to flauntwith this bag at one’s arm’; ‘it is the price to pay tobe allowed to buy this allegory of success’. This iswhy successful brands have to be more expensive.

Each year Rolex increase their prices systematicallywithout any objective reason (cost-based), just as anentrance fee.

• Last but not least, some consumers attribute luxuryhigh prices to the costly artifices of marketing(paying top models, ad campaigns, extravagant

défilés).

Summary of the findings

Figure 7.1 shows the three paths used by consumers determine the minimum price of luxury:

• In the first path, household budgets are anchoringpoints for any evaluation. ‘At €200, these days itwould already be a folly for me to pay this price.’This explains the high variance observed by Kapfereand Laurent (2012) in the quantitative study on price



thresholds: when in financial difficulty, no one canspend on non-necessities, even low-priced ones. Thithreshold may move through time for the sameperson.

• The second path is close to reference price theory:consumers use prototypical luxury brands, askingwhat is their entry range price: ‘Panerai watches arebeautiful. There is nothing below €6,000!’

• The third anchoring process rests on the necessarygap between luxury and premium. Luxury is notpremium: it is another world. Both prices should becontrasted strongly. According to one interviewee:‘To get very good solar eyewear, really protectingyour eyes, you need to pay at least €200 just for theglasses, maybe €100 for the frame. That makes €300in total. Therefore, I would not expect a luxury

brand to be close to this price, it should besignificantly above, say at least €500.’ According toanother: ‘Vanessa Bruno bags are priced at €340, anthis is not at all a luxury brand. I guess luxury bagsto be three times more expensive.’

FIGURE 7.1 How consumers evaluate luxury prices



When disposable budget is tight, the consumer experiencguilt in indulging in a luxury purchase. This is whwebsites such as Net-a-Porter, or Vente-Privée.com hadeveloped considerably. They authorize the transgressioattached to luxury purchases by giving the impression ofvery good deal. Still they respect the exclusivity of tbrands by working either like a private club, or bleveraging chrono-rarity (reduced prices during one donly) or virtual rarity (there will not be more than 10bottles). However, for other consumers less nancialltight or less oriented by ‘value for the dollar’, such sit

http://xn--vente-privcom-kp16b/



nd ways to increase their sales; for many, the temptatioto expand the customer base by creating more accessibproduct lines has been irresistible, despite warnings thsuch trading down can dilute brand equity and cause thbrands to lose their luxury cachet. Our ndings, based oa qualitative methodology, indicate that consumers drawinferences on the basis of the price of an item, but theinferences are also inuenced by the brand. Many brandare endowed with so much prestige that they can overcomany inferences that might be made on the basis of the pri

of selected product lines. Thus, a nice leather belt with Dior logo remains emblematic of luxury for consumerManagers should take advantage of this evident halo effec

This nding is particularly good news for luxurbrands that actively seek to nd a balance betweeexclusion and inclusion. Attracting new consumers (oftyounger ones) may require lowering the price barriewhich is not necessarily risky if the product retains presephysical elements that make it stand out as a qualieform of luxury, even at an accessible price. For instancDior recently launched a pair of earrings at €250: It habeen a total success. Despite this very accessible price, tproduct was endowed with Dior’s halo of prestigeHowever, for the halo effect to persist, the brand’s prestigmust be continuously reafrmed. That is, luxury brandneed to trade up too, in order to fuel the dream. ConsideArmani: on the one hand, it created accessible lin(Armani Jeans, Armani Exchange) to attract youthfuconsumers, while on the other, it launched Armani Privé,



highly exclusive label comparable to haute couture brandRalph Lauren created its Purple Label and Black Label fthe same trading-up purpose. Thus many consumers stifeel distinctive when they purchase a product from thPolo Ralph Lauren line, even though prices on these itemare regularly slashed for promotion or in factory outlets. price alone were the only cue of luxury, the brand woulalready have lost its considerable cachet.

For future luxury brands, this chapter also offerpredictive insights. Young luxury entrepreneurs migh

pursue the highest price points; for example, some watcbrands offer an average price above €50,000. But these ainherently niche brands. A luxury strategy does not meabeing the most expensive on the market. One can enact thluxury strategy at different price points (Kapferer anBastien, 2012). For an entrepreneur, the pricing questiorelates to the rm’s ultimate goal and its target marketExpensiveness has distinct meanings across differeconsumers. Therefore, an entrepreneur must rsdetermine the price at which the targeted market considea product equivalent to, or no longer, a luxury offeringFor the targeted market, the optimum price is above thluxury threshold but still a price he or she can afford, closenough in reach so that the dreams come true.

ReferencesAllsop, J (2005) Premium pricing, understanding the value of premium, Journa



Kapferer, J-N (1998) Why are we seduced by luxury brands?, Journal of BranManagement, 6 (1), pp 44–49

Kapferer, J-N (2012) Abundant rarity, the key to luxury growth, BusinessHorizons, 55, pp 453–62

Kapferer, J-N and Bastien, V (2012) The Luxury Strategy: Break the rules of marketing to build luxury brands, 2nd edn, Kogan Page, London

Kapferer, J-N and Laurent, G (2012) Luxury price thresholds, an internationalcomparison, HEC Paris Research Reports, Jouy-en Josas, France

Mazumdar, T, Raj, S and Sinha, I (2005) Reference price research: review andpropositions, Journal of Marketing, 69 (4), pp 84–102

Silverstein, M and Fiske, N (2005) Luxury for the masses, Harvard BusinessReview, 81 (4), pp 60–70

Veblen, T ([1899] 1994) Theory of the Leisure Class, Collected Essays, DoverThrift

Vigneron, F and Johnson, LW (1999) A review and conceptual framework of prestige seeking consumer behavior, Academy of Marketing Science Revi3 (1), pp 11–16

Wilcoz, K, Kim, H and Sen, S (2009) Why do consumers buy counterfeit luxurbrands?, Journal of Marketing Research, 46 (2), pp 247–59

Yeoman, I (2011) The changing behaviours of luxury consumption, Journal of Revenue and Pricing Management, 10 (1), pp 47–50

Yeoman, I and McMahon-Beattie, U (2006) Luxury markets and premiumpricing, Journal of Revenue and Pricing Management, 4 (4), pp 319–28

Yeoman, I and McMahon-Beattie, U (2010) The changing meaning of luxury, Revenue Management: A practical pricing perspective, ed I Yeoman and UMcMahon-Beattie, pp 62–85, Palgrave MacMillan, Basingstoke



08All that glitters is not green

The challenge of sustainableluxury

This chapter was originally published as an article European Business Review, Nov–Dec 2010, pp 40–45.

S ustainable development is on the agenda of the entiplanet. Intensive demographic and economic growdevoid of ecological concerns jeopardizes the life of futugenerations. In line with these concerns, governments, nogovernment organizations (NGOs) and consumers ask aeconomic sectors to change fast.

Luxury has recently been a target for public criticismaccused of lagging behind – if not at odds with sustainable development imperatives. Focusing on speciproducts and consumers, critics point at the waste oresources for the pleasure of a happy few. Luxury attractspecial attention for, beyond ecology, sustainable



development talks about social equity. Now, a deepeanalysis reveals how much sustainable development deeply congenial with luxury, but real luxury: both takrarity as their central concern and real luxury is bdenition durable. Certainly luxury highlights thinequalities of society, but it does not create thesinequalities. Acting as a paragon of quality, luxury wineed to act as a model in sustainability. All major realuxury brands have already responded to the demands osustainability, but without much communicating. Can

luxury brands be at the leading edge of sustainabilityMuch still remains to be done – and a luxury strategy the most efficient way to foster ecological behaviours.

Luxury under pressure of sustainable

developmentSustainable development has become the major collectichallenge on our planet. Although not all countries havsigned the Kyoto Agreement, most manifest a conceabout the limits of our natural resources and the need tnd a new type of economic growth that takes intaccount the costs of its collective negative fallouts, so funmeasured, which bear on future generations.

Sustainable development (SD) is a global concepromoting a society that can persist over generations. Asresult it should make prudent use of the planet’s resource



(physical, human, biological). Beyond ecology, sustainabdevelopment promotes the conservation of biodiversity anatural resources, and is also concerned with social equitAt the extreme, some advocates of SD consider thgrowth in itself is the problem.Many countries have already incorporated this newparadigm into their public policies, legislation anregulations. Incentives and laws are being enforced that squantitative targets for carbon dioxide emission reductioor pollution control.

Sustainability demands impact consumers themselveseither as polluters through the type of purchases themake, or as guardians of suspect corporate actions. Activmilitant groups and NGOs scrutinize corporate anindustrial behaviour and reveal the culprits to the public.

Recently, the luxury sector has come under enormouscrutiny. Reports have criticized this industry for lagginbehind (Bendell and Kleanthous, 2007). Some even say thsustainable and luxury are incompatible terms. To drive Rolls-Royce, a Maybach or a Mercedes S Class would bemessage that the owner couldn’t care less abouoverconsumption of fuel and the warming of thatmosphere. Although it is the projected mass diffusion middle-range cars in China or India that constitutes threat for the planet, critics point at the behaviour of thrichest, whose energy consumption per capita disproportionate. As a consequence, many professionconferences and symposia on luxury and SD have emergewhere the stars of the sector have at rst not been presen



Since luxury is supposed to mean excellence, the prospeof being criticized explains their initial reluctance. Thdoes not mean that they were not concerned: as focorporate social responsibility (CSR), all luxury grou(LVMH, Kering, etc) had already put SD at the top of theiagenda as early as 2001, but had not publicized it. Luxurhas moved forward but does not talk much about it.

The focus of this chapter is to analyse in depth threlationship of luxury to SD, both conceptually anpractically. Conceptually, luxury is a fashionable word

used by many companies and brands who are not in facimplementing a luxury strategy, but a fashion strategy or premium strategy. For instance, L’Oréal Group can hardlybe seen as a luxury group: it does not dene itself as sucIts most known brand, L’Oréal Paris, is sold only isupermarkets, as well as Garnier, Maybelline, etc. There ia prestige division with Lancôme as agship – a masprestige brand – and the fragrance licensees of majluxury or fashion brands. Yet both activities do not qualifas luxury due to their mass production and thpredominance of quantitative goals over qualitative raexcellence. We need to give the word luxury its remeaning back.

In terms of practical issues: to what extent can luxurbrands incorporate sustainability demands and yet remailuxury? For instance, sustainability author Bendell (200mandates luxury brands to produce environment-friendproducts and services. However, the world’s least fueconsuming car is the small Nano made by Indian Tata an



sold at 2,629. Since luxury can be dened as the highequality and creativity without constraint, hencdisregarding costs, luxury cars will be more consuminthan a Nano unless luxury takes on the mission to be thrst to develop fully electric superb cars for thosconsumers who can afford them and will be pleased tshow how rich and also environmentally conscious thare. This has been the success of Tesla. Nevertheless, many other luxury sectors, a 100 per cent move to ethictrade and green concerns today would hurt the quality o

their products. That said, all luxury groups have silentladopted the high goal of becoming sustainable luxurmodels. We do not talk here about ‘greenwashing’ such asending money to some wild forest preservation group anletting it be known, but rather a true incorporation of thgreen concerns (another word for SD) into the whole valchain (sourcing, creating, manufacturing, logisticdistribution, marketing, servicing, waste and recycling).

Luxury and SD share two deep concerns:rarity and beauty

A deeper analysis reveals that luxury and sustainabdevelopment converge: both focus on rarity and beautyThe essence of real luxury is to sell high-quality creatiand rare objects with an image of good taste and elegancHistorically, luxury was the privilege of those who ha



money, taste and power. Recently its growth – anddeviation – is due to an overextension of its consumbasis, through accessible mass-produced accessories thcannot be qualied as luxury products, even if they arendorsed by luxury brands. But the recession triggered 2008 put luxury back into its rightful place.

Beyond the brand exclusive image, luxury value based on its objective rarity – rare skins, rare leathers, rarpearls, other rare materials, rare craftsmanship. Thuluxury is resource dependent and obsessed by th

sustainability of its resources: high price limits the demaand is the best way to protect the future of these resourcehence the sector. What most threatens the resources of thplanet is mass production, not small production volumeThe overconsumption of plastic packaging by maconsumer goods (bottled water, for instance) far exceedthe recycling capacities of the world. The sophisticatewrappings around luxury products, as a symbol of a gift toneself or another person, are a tiny drop compared to thiocean of neglected ecological damage, more so if the paptoday is recyclable. Luxury is the enemy of ththrowaway society.

Distinguishing the luxury strategy from afashion or premium strategy

Can there be any beauty based upon a mass of disgracef



pollution and unfair labour practices? Because the worluxury has become so fashionable, many companies useto justify their own existence. However, to say is not tdo. Kapferer and Bastien (2009) have shown that luxury in fact a business model, created by the likes of pionecompanies such as Rolex, Louis Vuitton, Hermès, Ferraand Chanel – and that many so-called luxury brands werin fact following another business model, closer to that fashion or premium goods. Real luxury is not aimed acost reduction but at the creation of value, through rar

and unique singularities, like no delocalization. Unlifashion brands, which delocalize as much as they caluxury adds up elements of uniqueness such as producinin its home country. The scandal of sweatshops in Chinwas associated with mass brands such as Nike and witfashion brands who have all delocalized their productioto the Far East in order to capitalize on low labour costand the corresponding work conditions that accompanthis. In contrast, luxury brands stress:

• Importance of crafted, handmade products and raresavoir faire. Far from exploiting unskilled labourforces, as does the mass fashion industry, either

directly or through its licensees, luxury brands needto sustain skilled workforces and even recreateschools to revitalize curricula that are disappearing.

• No licences. Luxury brands produce goods in-house,even their accessories. Chanel watches are made inthe Chanel factory. Chanel N°5 is made by the hous



factory too. Fashion brands, on the contrary,multiply licences worldwide. This is built into theirbusiness model. Once a product is out of fashion, itmust be sold with huge discounts on e-commercesites, or factory outlets. This destroys the margin:delocalization and the use of licensees to meet theneed of fashion to have the garments producedanywhere in the world at minimal cost often meanthat licensees are rarely well controlled and licenseein turn can hire sub-licensees, with virtually no

control over the labour conditions.

Luxury is by definition durable

Durability is at the heart of sustainable development awell as luxury. Durability is the enemy of the fashioindustry and of the mass-market industry, based onplanned obsolescence. Luxury, on the contrary, is in thbusiness of lasting worth: 90 per cent of all Porsches evproduced are still being driven; Louis Vuitton providafter-sales services to any genuine Louis Vuitton producwhenever it was bought. The same holds true for Ferrarthe Maranello mechanics will work on any old Ferrarwhatever its age. This is why there is a large aftermarket the luxury business.

At a managerial level, durability is a central tenet oluxury companies. The fashion business, on the contrarylives on short cycles, short time spans and perspective



just like the next issue of Vogue. Luxury is managed withlong-term perspective. Often these houses are a century oand refer to a heritage that is a key part of their intangiblextra value. New designers called to reinvent the brand, tmake it relevant to the younger clients of the world, padue tribute to this heritage and reinterpret it with respecOften in family companies the managers are not pressed deliver high growth gures at each quarter, whatever theconomic circumstances. Finally, products are built to laand forgo obsolescence, their beauty should last, as shou

their functionality: hence the service associated with theAll Miele appliances, for example, are built to last up t20 years.

Why would such an industry that is obsessed witdurability – and that is so resource dependent – overexploits own resources? Jewellers care for their mines as thfuture depends on them.

Why this present SD focus on luxury?

According to the estimates of Bain & Company, luxurtotal revenues amounted to €223 billion in 2014. Whwould a sector a bit bigger than WalMart be so concerneabout its sustainability? The answer: because this is a vevisible sector, whose public attraction is linked to its highprole consumers, VIPs and celebrities. SD advocates alcare about social equity. No sector reveals the worldsocial inequality as much as luxury. Because econom



growth in most emerging countries is based on the desiof the middle class to emulate the richest, luxury is said be a factor of social tension. Due to its conspicuousnesluxury encourages aspirational consumer buying beyonrationality.We should, however, remind ouselves of existinrealities. Economic growth based on internal demansupposes that this demand exists: imitation is a potenlever of consumer behaviour (the famous ‘keep up with thoneses’). Moreover, we are in an era where resources w

be scarcer. Is it due to luxury? Of course not: it is due tmass-consumption growth. The many low-cost airlincompanies have boosted global consumer demand for atravel – a high kerosene-consumption activity – not thprivate jets.

So why this focused critique of luxury? The answebecause of the symbolic nature of luxury consumption ashuman activity and the celebrity of its main clients.

First, luxury purchases are by denition irrationaWhy pay $1,500 for a handbag whose function is the samas a handbag at $150? What is bought for the $1,350difference? The essence of luxury is singularity: everyththat makes the piece appear out of the ordinary. Itencompasses the objective extreme quality to the homcountry where it must be made, as well as handcraftintime and the one-to-one caring service in exclusive retstores. It also extends to the capacity of the brand to singout the buyer as a person of taste, elegance and statu(Han, Nunes and Drèze, 2010). The consumer become



someone out of the ordinary, someone unique, as long athis is signalled by pre-eminent logos: hence the craze Asia about luxury goods and brands (Chadha anHusband, 2006). After 50 years of communism and forceuniformity, the Chinese can dress as they want to bperceived, and show they are no longer poor. Consumptiois thus a foremost zone of freedom and elevation.

The irrationality of luxury is precisely what makes stand apart from all other types of purchases (arexcepted): in Maslow’s pyramid, buying objects beyon

mere functional reasons is a sign of human elevation.Second, luxury means excess: it comes from the Latroot luxus. In luxury everything is in excess compared standard industrial products or services, a fortiori to lowcost ones. Since the luxury industry exhibits the highegross margins of all sectors (Kapferer and Tabatoni, 2011it is not much concerned with cost reduction but witcreation of value: making the buyer feel like a VIP, anstand apart. This starts at the ingredient level – only thbest ingredients; then production (with much care, timexpertise, quality, craftsmanship, etc); retailing (in thnicest places and environments); and servicing anbranding (the conspicuous name endows prestige, glamoand distinction on the buyer). This excess is by denitiocriticized in an SD perspective, which promotes contrasting ethic: frugality and self-restraint today in ordto ensure the happiness of the next generations. Why havbig engines, for example, if small engines are sufcient power cars – which in any case will be used only to g



from home to downtown and vice versa? A 6.5-litrBentley engine for the pleasure of the few rich is provocation.

Thirdly, luxury signals inequality. Only the rich canbuy Bentleys, huge gas-guzzling yachts, private helicoptor jets, etc. Beyond achieving their personal dream, thehappy few are also destroying collective capital. Certainthere are very few rich compared to the billions shoppinon the mass market. But, per capita, the rich wouloverexploit collective capital (natural resources that cann

be replaced).The SD critique of luxury points at emerging countriwhere the extremely poor coexist with the extremely ricInterestingly, however, it is the biggest communist countrin the world (China) that itself promoted luxurconsumption in its own domestic market. After thTiananmen Square protests in 1989, Chinese PrimMinister Deng Xiaoping urged: ‘get rich and gloriousthus freeing the entrepreneurial forces of this giacountry. He knew the force of the imitation motive as lever of economic growth. Since then social inequalbetween urban and rural dwellers has grown. But luxurgrowth is a consequence of it, not a cause: China habecome the number-two luxury market in the world.To summarize, luxury is criticized by SD advocates nso much because of its objective impact on the planetresources but because of its high visibility and iconsiderable symbolic power, much more than its reaeconomic weight.



Acting as an SD model to preserve luxuryreputation

SD is not only an altruistic opportunity, it is a businesimperative for luxury.Celebrities know they are opinion leaders and, as suc

should act responsibly. Today, they demonstrate ethicalconcerns and substitute an ethical stratication for powestratication. Cautious of not endorsing brands that areinsufciently ‘eco clean’ or sustainable and, as such, wouhurt their own reputation, they stimulate fast change.

In fact, all luxury groups have already made structuradecisions about this, either by creating cross-categorienvironmental task forces, or through charters that makSD an inherent criterion in all decisions. LVMH initiatean environmental charter as early as 2001 and SD inseparable from its strategy. Like many others LVMH habeen auditing its carbon footprint since 2004 and has takeas a managerial motto the four words: renew, recyclereduce, review. The same holds true for Tiffany, a pioneein that respect – as already mentioned, one cannot bugems and not care about mining conditions.

Real luxury brands have always created new extremfor quality. They set their own standards, superlative onesThese standards will have to become higher in new waythe quality of a diamond cut should not obliterate thmining conditions. Soon, through the internet, bloggerrumours will reveal the real conditions behind the lust



(at the sourcing level, or at the production level). Becauluxury brands’ very high gross margins rely strongly their intact lustre and immaculate integrity (Kapferer anTabatoni, 2011), they have more to lose from anyreputation crisis.

Is SD ready for luxury standards?

In practice, how do we reconcile the demands of frugalit

self-restraint and the built-in dimension of luxury – utmoquality, creativity, freedom, lack of constraints, excess ocare? Should one ask Alexander Wang to halve thquantity of fabric he is using at each catwalk show? Shouall fashion luxury brands adopt a minimalist look, thulosing all capacity to differentiate and surprise? Whabout Jaeger-LeCoultre’s use of rare dogsh skin, whiccannot be found in sea farms, for their wristwatches? Athe retail level, should Cartier cut the air conditioning itheir luxury boutiques? Or stop wrapping their watches ia nice gift package? In the tourism business, a modethree-star hotel is more energy efcient than a Scottiscastle. Should one destroy these castles?

The question of the compatibility between SD anluxury is the same as the question concerning fair tradWe know the answer today. For instance, AlterEco, abrand of fair trade chocolate, soon realized that fair tradcould not be the consumers’ number-one reason fopurchase. A chocolate bar had to taste very good, rst an



foremost: fair trade could not be an excuse for a less thasatisfying palate experience.

One should not underestimate the practical difcultieor remain purely dogmatic. Two examples will illustratthe problem of compatibility. In skincare, innovation is oparamount importance, as well as preserving the health othe clients. Luxury is about excellence: more than another, luxury brands guarantee zero risk. Now there aremore and more pressures from lobbies and animal defengroups to forbid testing new molecules and skinca

products on animals. But then how can any brand ensurthat its radically new products in the future are harmless they have never been tested? When Stella McCartnlaunches her new bio-organic cosmetic line, how can sbe sure that it is really hypoallergenic and will not harclient’s skin if it has never been tested? She cannot.

Today, sustainability creates difculties to maintain thlevel of superior quality of premium brands. Created 1933, the best polo shirt in the world, Lacoste 12 X 12owes its reputed quality (softness, durability, resistance trepeat washing) to the exceptional Pima cotton from PerIts long bres are used in making the 25 kilometres othread needed for each Lacoste polo shirt. Buying cottofrom sustainable trade would certainly demonstrate thaLacoste does actively contribute to the enhancement of teconomic level of local producers in emerging countrithis would be an ethical achievement. However, Lacoswould not be Lacoste any more: at this time, sustainabcotton does not deliver the same quality and performanc



as Pima cotton. In addition, no single source produceenough of it. Lacoste would have to buy ethical cottofrom many suppliers in the world, thus introducinheterogeneity in the look and feel of one polo shirt tanother.However, all luxury brands do advance fast to meet thdemands of SD. Let’s take a Dior handbag as an example

• It is made in Italy, for this country is reputed for itsexcellent leather suppliers and their know-how. Alsoit produces less CO

2 than if it was made in China, as

is the case for Coach.• These better leathers come from Italian bio farms.• Once sold, the bag is put in a ‘cover’, then in a box,

both being recyclable.• It is presented in catalogues (the main part of a

communication budget in luxury is edition) withsuperior quality paper – coming from sustainableforests. Soon it should be replaced by onlinecatalogues.

Thierry Mugler’s recent fragrance Womanity advertises itaking care with its carbon footprint. This brand now sellrellable products. Dior cosmetics decided to forbid thuse of silicons in their products. Doing so, they knew ththese products would lose the experiential benet osilicons: the soft touch and feel.

Tiffany is another example of taking SD very seriousl



Looking at their brand website, one reads the TiffanCommitments (‘Sustainability our most important desigNature is our best designer’). Tiffany views it as a morobligation to protect the places and communities whetheir precious material comes from. As a result, Tiffancares about:

• the source of their gems and the mining practices:they do not buy Burmese rubies;

• which countries it deals with – only those who have

signed the Kimberley process;• local communities: they support the Alaskan pledgefor no mines there; Tiffany signed the Bristol BayProtection Pledge;

• large-scale mining;• collaborative efforts;• not using real corals since 2002;• energy conservation;• recyclability: 95 per cent of the paper for catalogues

is certified by the Forest Stewardship Councils (FSCas well as the iconic Tiffany Blue Bag (FSC certifieplus biodegradable, recyclable plastic film).

Another example, Fauchon, the luxury grocery store iParis, has stopped selling counter-seasonal fruits anvegetables (ie buying summer fruits in winter) because thcome from the other side of the planet and so are a CO2



Status redefined: from power to altruism

Luxury can lead the way by redening the notion oquality and the luxury dream, no longer a selsh dream oan individual, but one that takes into accounenvironmental concerns. To remain a leader against masgoods and fashion, luxury will have to be sustainable social, economic and ecological terms. This is built into genes and business model. As a result, luxury groups wbear down upon their providers and distributors toaccelerate behavioural changes and align faster with Sstandards. By doing so they will play a leading role in tredenition of the modern hero. The rich of tomorrow widemonstrate, by their conspicuous choice of luxury brandnot only their taste and wealth but their sense odiscernment and altruism.

ReferencesBendell J and Kleanthous A (2007) Deeper Luxury Report, WWF, LondonChadha, R and Husband, P (2006) The Cult of the Luxury Brand: Inside asia’s

love affair with luxury, Nicholas Brealey, London

ee Han, Y, Nunes, J and Drèze, X (2010) Signaling status with luxury goods:the role of brand prominence, Journal of Marketing, 74 (4), pp 15–30Kapferer, J-N and Bastien, V (2009) The Luxury Strategy: Break the rules of

marketing to build luxury brands, Kogan Page, LondonKapferer, J-N and Tabatoni, O (2011) Are luxury brands really a financial

dream? Journal of Strategic Management Education, 7 (4), pp 1–16



Further readingAmeldoss, W and Jain, S (2005) Conspicuous consumption and sophisticated

thinking, Management Science, 51 (10), pp 35–45

Corneo, G and Jeanne, O (1997) Conspicuous consumption: snobbism andconformism, Journal of Public Economics, 66, pp 55–71Hurth, V (2010) Creating sustainable identities: the significance of the

financially affluent self, Sustainable Development, 18, pp 123–34Kapferer, J-N and Michaut, A (2014) Are luxury purchasers really insensitive

sustainable development? New insights from research, in Sustainable LuxuChapter 7, eds M-A Gardetti and A Torres, Greenleaf Publishers, London

Kapferer, J-N and Michaut, A (2014) Is luxury compatible with sustainability?

Luxury consumers’ viewpoint, Journal of Brand Management, 21 (1), pp 1–22Mandel, N, Petrova, PK and Cialdini, RB (2006) Images of success and the

preference for luxury brands, Journal of Consumer Psychology, 16 (1), pp57–69

Rucker, DD and Galinsky, AD (2008) Desire to acquire: powerlessness andcompensatory consumption, Journal of Consumer Research, 35 (August), p257–67



PART THREEThe business side of luxurybrands’ growth



09Not all luxuries act alike

The distinct business modelsof luxury brands

Luxury is everywhere, in the media and on the streets. Scalled luxury brands are nearly countless, which is a signof post-modernity. The right to be happy is claimed beveryone, leading to extended desires for the symbols happiness, namely, possessions. Such ubiquity suggests thall these luxury brands grow similarly. This chapter showthat even when different brands are described by the wor‘luxury’ – a catch-all term adopted by consumers anmanagers – they adopt disparate business models, wit

contrasting managerial implications for growth. Ainteresting nding reveals that each major luxuryproducing nation is predominantly associated withone of these models. At a global level, beyond the brands,thesemodels compete to establish a singular, denitive versioof what constitutes luxury, as well as what does not.



The desire for luxury

Luxury is in fashion. What once was the ordinary foextraordinary people has become the extraordinary foordinary people. Accordingly, the luxury sector haexperienced continuous growth since 1980. In reviewinonly the personal luxury goods market (eg leatheclothing, jewellery, fragrances, skincare), Bain & Compan(2014) estimate the 2013 global market to be worth €22billion (retail); though the United States remains the tomarket (and New York the most luxury-centric city)China accounts for most current growth. Noting thvarious explanations available elsewhere, we simpsummarize them briefly here:

• There are more rich people than ever before,

especially in high economic-growth countries. Astrict correlation arises between gross domesticproduct (GDP) growth and luxury market growth.Examples appear in virtually all emerging economieForbes notes that Moscow has more billionaires thanany other city. The richest individual in the world isa Mexican business telecom entrepreneur. But thesebillionaires and millionaires do not constitute a hugor growing market on their own. They feed the‘absolute luxury’ industry (eg yachts, private jets,real estate, hotels and palaces, Rolls-Royces orBentleys), but the growth of the conventional luxurysector stems more from ‘ordinary people’,



categorized in the upper middle class.• The extension of the desire for luxury now

encompasses all strata of society, and especiallyyoung consumers. This factor explains why theaccessories market has grown so fast. Few people cabuy a Dior haute couture dress or even an iconic,classic Chanel tailleur. In contrast, Dior-brandedeyewear is much more accessible, as is a Chanelwatch. They also grant an instant reputation for clasto the person wearing them.

• For many modern consumers, a luxury purchaseremains an exceptional event. Accordingly, Chanel,Hermès and Cartier have raised some of theirproducts to the status of ‘icons’, with their owncults. These product icons are timeless and mustremain so to attract and maintain desire from

ordinary people over the long term. If a person willbuy only one Hermès bag in their entire life, theyshould buy the iconic version (ie Kelly or Birkin). Fwatch brands, iconic products could lose theirattraction if they have been owned already for a longtime, if the most expensive version is already held b

the consumer, or a consumer even has a collection othem. To refresh the iconic dream, luxury brandsissue limited editions, designed by artists and pricedat highly discriminatory levels, which can re-sparkdesire.



Behind a single term, multiple businessmodels

Through its growth, the luxury market has emerged as aattractive sector to corporate investors; luxury thus habeen called a ‘nanciers’ dream’ (Kapferer and Tabaton2011). Business angels, investment funds and luxugroups (eg LVMH, Kering, Richemont, Starwood) seek ouemerging brands with high luxury potential that are ineed of cash or expertise to fuel their retail expansio(Ijaouane and Kapferer, 2012). But learning how to growor build a luxury brand requires further consideration ipractice. The answer cannot be asking consumers, whwould likely just parrot the marketing lessons that luxurbrands have taught them. A classic pitfall of luxurresearch thus is asking consumers: what is luxury?

First, ‘luxury’ is a word derived from Westerlanguages, and most consumers’ knowledge stems not frothe essential concept but rather from their experience owhat a majority of others describe as ‘luxury brandsThus, denitions of luxury stemming from consumresearch tend to look like circular reasoning, offering me

descriptions of the generalized marketing practices brands (usually international ones) that the local vopopuli refers to as luxury brands. Typical terms used tdene luxury include expensive, high quality, or beautifuproducts sold in select stores on the high street.

Second, on a related note, the denitions reec



consumers’ subjective perceptions of what is expensivselective or beautiful. Luxury consumer surveys ainherently limited; samples recruited on the street through internet panels – not to mention academic researcthat makes abusive use of college student samples to taabout luxury – cite what people from their social oeconomic class consider to be luxury. The resultindenitions depict what a luxury brand ‘looks like’ to regular layperson, not the richest consumers. For examplwould the billionaire Bill Gates or a Russian oligar

necessarily consider Cartier or Louis Vuitton luxurbrands? Denitions depend on the identity of the personbeing interviewed, so brands that t the denition oluxury for a young Indian or Chinese manager, just hireby a multinational company for their rst job, likely dnot match the brands identied with luxury by someonwith extensive, lifelong experience with expensive, rahand-crafted products.

Third, consumer-based denitions ignore thmanagerial process of value creation and the brand’s proequation. In response, this chapter analyses some of thbusiness models that predominate in this sector. For welknown luxury brands, their business model reects thmanner by which they deliver value to customers, enticustomers to pay for that value, and convert thospayments into prot (Teece, 2010). According toMoingeon and Lehmann-Ortega (2010), a business moddescribes the mechanisms that enable a company to creavalue through:



• the value proposition made to clients;• its value architecture;• the ways it harnesses this value to transform it into

profits (profit equation).Kapferer and Bastien (2012) dene and differentiate luxury strategy, a fashion strategy and a premium strategythis chapter extends that analysis to masstige (mass prestige) or fast-moving luxury goods (FMLG). Oanalysis reveals different business models taking prioritydifferent countries: most Italian brands (eg Armani, PradVersace, Dolce & Gabbana) follow a fashion businesmodel (Corbellini and Saviolo, 2009), and those that dnot (Loro Piana, Bottega Veneta, Bulgari) have generalbeen purchased by French luxury conglomerates. addition to abundant cash infusions, these purchase

granted the luxury brands access to a culture devoted ttheir existing business model, which we refer to as luxury strategy. In contrast, in Germany, known for ithigh-performance cars, where any extra costs must bjustied rationally by additional quality, Mercedes-BenAudi and BMW enact a premium strategy. Finally, thUnited States has developed a worldwide masstige modoffering ‘luxury for the masses’ (Silverstein and Fisk2003), with brands such as Ralph Lauren, Coach anVictoria’s Secret. These brands have gained a high-enimage, despite being mass-produced and distributed widerather than exclusively in moderately selective channe



The United States is also the only country where stores cprovoke headlines such as ‘Luxury at $10’, promoting thidea that luxury is not necessarily tied to high prices aninstead can be for everyone. Even the Luxury MarketinCouncil, based in New York, promoted the idea o‘Health, the Luxury everyone can afford’. Table 9summarizes these business model comparisons; willustrate the models by their most typical brands.

What discriminant criteria differentiatebusiness models?

In a recent survey of luxury consumers (BVA, 2013identified as such when they declared purchases of persongoods above a specied price, 200 persons indicate

whether they perceived listed brands as luxury or not. Thresults for a few brands are insightful (percentages people perceiving them as luxury brands): Ferrari 54 pcent, Rolex 45 per cent, Chanel 45 per cent, BMW 39 pecent, Audi 38 per cent, Mercedes-Benz 32 per cent, Arma30 per cent, Ralph Lauren 22 per cent, Prada 22 per cenand Lacoste 23 per cent. These data do not claimuniversality; like all samples, the ndings are situationatied to the nationality and prole of respondents. Yet eveamong the last three brands listed, we nd approximatelequal luxury scores but widely divergent business modePrada is managed like a fashion house, Ralph Lauren is



typical masstige brand, and Lacoste is following RalpLauren by trading in its premium image for a masstigplan, with a touch of the fashion model.

TABLE 9.1 Comparison of business models operating onthe luxury market

Luxury Fashion Premium

Masstige(Massprestige)

Value versusvolume

Value Mixed Volume Volume

Price policy Always up Up anddown

Trade up Up anddown

Rarity From scarcityto virtual rarity

Limitedseries,ephemeral

None or lackof demand

None oralibi forhigherimage

Time Timeless Fast, now Today’stechnology

Inventedlegend andhistory

Production Atelier,verticalintegration

Smallfactories

Factory Massproduction

Cost saving No concern Essential Normal Essential

Relocalization None Necessary For customs Necessary

Qualityorientation

Respectful oftradition, craft

Goodenough

Performance Goodenough

Innovation Transgression Creativity Breakthroughs Service,digital



Discountpricing

Never Necessary Limited Factoryoutlet,internet

Licensing Never Always Limited Always

Portfoliogrowth

Brandextension

Brandstretch

Limited Brandstretch

Role ofmarketing

No marketing:offering

Salesanalysis

To test newadvances

To orientdesign, andproducts

Role of retail Select buyers;nurture cult

Directlyoperatedstores

Distributeand sell

Sell andservice

Createprestige

impressions

When we refer to a fashion business model, it does nnecessarily imply that the brand’s offerings are perceivas fashionable by consumers but rather that it is manage

as a fashion house. For this chapter, the terms masstigefashion, premium and luxury refer to operating principlenot public perceptions (which likely would tend to lumall these models together under the umbrella term‘luxury’).

Value versus volume orientation

Ferrari purposely limits its sales to around 7,300 cars, anRolls-Royce has announced that it will not increase thvolume of production (3,630) but rather aims to enhanc



the value of each automobile it produces. In contrast, therare no set production limits for Porsche, BMW, Mercedeor Audi. That is, production capacities might create dfacto limits for specic times, but these limits can bremoved by the construction of new facilities, usually proximity to high-growth geographical areas such aChina. A luxury strategy does not pursue such volumincreases, because rarity is an intrinsic part of the creatioof value. The production of iconic Hermès bags is limitby a deliberate production bottleneck, tied to the time

takes for a single craftsperson to make one bag (20 hourand the need to coach newly hired craftspeople for monthsuch training by expert craftspeople leaves them less timto devote to making their own exceptionally crafted leathbags. Furthermore, the wait is part of the construction odesire. If a consumer could buy a bag as soon as the desiappears, without waiting, then the risk exists that one dasoon the consumer might start to want another bag, fromanother brand.

This factor is also a prominent concern related tselling product ranges on the internet. For the sake omodernity, or convenience, or just because other brandare already doing it, luxury brands often are urged to havan online presence and fully embrace e-commerce. Bshould they really? Time is essential to a luxury strategon the production side, sufcient time is needed to providexcellence, and on the demand side, more time increasdesire, even if it might frustrate younger luxury consume

Fashion, by its very nature, has none of these concern



the focal consideration for a fashion model is remaining fashion and not having a large inventory remaining whethe season ends. Thus, fashion businesses like limited serthat not only create articial rarity (a key part of Zara’business model) but also mitigate concerns of overly larunsold inventories.

Finally, neither the premium nor the masstige modehesitates to increase volume, without limits. Lexus aims become the ‘number-one imported luxury car brand in thUnited States’, such that it explicitly seeks to surpass t

German brands in volume. For the masstige brand RalpLauren, which is now a publicly listed company, thobjective is clearly unlimited growth; Ralph Lauren himsis less a designer than a businessperson. Although thcompany has introduced some high-end labels (BlaLabel, Purple Label) to create a trading-up, halo effect, themphasis on the rarity of these options in advertisinmessages mainly serves to compensate for the model thdominates the core business, Polo Ralph Lauren: niclooking products, mass-produced and sold in prestigendowing stores. In addition, Ralph Lauren needs counterweight to high factory outlet sales and latencommoditization, which threatens masstige brands, onceveryone is seemingly wearing a Polo Ralph Lauren shirt

Relation to scarcity

This facet is a corollary of our preceding discussion: luxu



facet of it, though also with its own story and legendCartier is not only the name for crowns for royalty bualso the brand on Tank or Santos watches.

Fashion is, by denition, innovative and linked to ittime. Fashion says ‘Buy this now!’ because the item is t‘it’ thing. We can differentiate between slow fashion, sucas Italian brands that express the spirit of their homelandand fast-fashion exemplars such as Zara, H&M andMango that use the rapid rotation of limited series tencourage shoppers to buy immediately. Luxury is th

exact opposite of this push to repurchase; luxury brandexpect that consumers take time to invest thousands oeuros in a particular watch, for example. Other than theultra rich, people also need time to build their desire ancapacity to buy a specic, seemingly timeless model. Thuthere is never any rush.

Premium brands are threatened by obsolescence. Theappeal is based on progress and product comparison(unlike luxury, which aims to be non-comparable)Technological progress is a temporary ally. Consider thbattle between Samsung and Apple. The Californian branthought it would remain in a state of monopoly, buSamsung’s technological savvy and rapid reactivity hadulled Apple’s competitive edge and market sharadvantage. Thus, Samsung is now the world leader in thsuper premium smartphone market. This is why Apple now adopting a luxury business model.



Production process

Even when retail strategies appear identical (exclusistores, prestigious addresses), radical differences maproduction and logistics across brand types. Masstige, anoted previously, is an efcient business model thaconvinces people they are buying class when actually tgoods are mass-produced. Ralph Lauren again offers ainstructive case: its superb stores are lled with niproducts, with a wealth of small details that providvisible markers of class and quality. Thus, a classic navyblue blazer, with four embossed buttons on each sleeve ana visible royal blazon on the chest, can sell for £250 in thNew Bond Street store in London, before having its pricut in half at the end-of-season super-sale. The produclikely came from a plant in Hong Kong, purchased fo

around £18.At the other extreme is the vertical integration of thatelier, the workplace of craftspeople who personify luxurbrands, whether they produce watches, suits or jewelHigh-end fashion, typied by the Italian brands, is insteaassociated with small factories. Fast fashion makes use huge factories, though Zara has developed a cluster osmall subcontractors in Spain to produce small, on-demanseries that can be tested within two weeks in any store the retail chain. Finally, the premium strategy, which relieon comparisons of performance, needs to nd ways treduce human factors, which from an engineerin



standpoint are simply potential sources of aws. Againthis view contrasts directly with the prioritization of thhuman touch in luxury models. The premium businesmodel is highly industrialized, because it needs to be. Hixed costs in the automotive industry require thespremium brands to leverage group synergies. Thus thPorsche Cayenne features many parts that are nogenuinely or exclusively made by Porsche: its platformequivalent to that of a Volkswagen Touareg; however, theengine and gear mechanisms are denitely Porsch

products, as is the overall look of the car.

Cost-saving orientation

The cost of goods sold is an essential entry in any rmprot and loss (P&L) sheet. However, the precedindiscussion suggests that the various business models trethese costs differently. At Hermès, the CEO insists that thcompany should not spend time on cost reduction buspend it instead on value creation. This call is not tsuggest that the brand should overspend; rather, thfunction of luxury brands is to ght against the boredomcreated by a saturation of desires and products. Thuproduct designers seek not to renegotiate a better price falligator skins, for example, but to nd new, exceptionaskins that can be tanned with incredible, rare, new colourwhile also respecting the environment and thus creatingtimeless, beautiful object like no other. When Ford Moto



Company bought Jaguar, it applied Ford managemenmethods, such that the brand became a victim of cocontrollers, whose job was solely to reduce thmanufacturing costs. The shift eroded the Jaguar dream sbadly that ultimately Ford was forced to sell the brand tTata, the Indian car manufacturer. In a luxury strategy,traditional marketing laws are turned upside dow(Kapferer and Bastien, 2012).

Fashion brands are concerned about manufacturincosts for one reason: they can charge full price for on

about half the shelf life of any product, after which it wibe discounted. What we call ‘shelf life’ is the time thatgiven item from a fashion brand can stay in a regular storon the shelf. At the beginning it is 100 per cenfashionable, hence expensive, but with time it becombought by all and loses its edge. In the nal months it ‘yesterday’s’ fashion: it is then time to move it to factooutlets and slash its price, since it has lost value. Even atdiscount, the product needs to remain protable, so thcost of manufacturing is always an issue.

Masstige brands tend to be adept at ‘design to coslean management. Coach, to earn its exceptional operatinmargins, relies on three factors: 1) a high level of renew(eg introducing new colours and designs every month); moving production to China to reduce costs and makprices accessible (50 per cent less than luxury brands); a3) the cultivation of a luxury image (imitating the codes luxury, opening exclusive stores in major capital citiesCoach thus offers a very successful fast-moving luxu



goods (FMLG) model, directly inherited from its formowner Sara Lee, a fast-moving consumer goods (FMCGconglomerate. Just as any mass-market brand must launcline or brand extensions every year, 70 per cent of Coachnet sales come from newly introduced products.

Relocalization of production facilities

Most Coach production takes place in Asia or elsewher

Not so for Hermès. Although both brands are extremelprotable, only Hermès commands extremely high branequity, as directly measured by its pricing power. For luxury strategy, the manufacturing site is part of thdream, the construction of singularity, the incomparabilitand, thus, the high price (Karpik and Scott, 2010). Luxurbrands’ obsession with localization is part of thconstruction of their intangible value. Why would Chinese consumer queue in front of the Louis Vuittotemple on the Champs-Élysées in Paris if the produccame from China? Each Louis Vuitton bag is not onlmade in France but also ‘made of France’. Only winfrom the sacred Champagne region, in the east of Francmay be called champagne. Places, lands and countries origin thus act as a type of endorsement. Yet Italian brandhave found a way around the constraint of producing iItaly; they sell the very powerful ‘Live Italian’ dream. FZegna or Prada, Italianness is part of their business DNAso local factories add little, especially when compar



against the advantages of producing outside Italy. MartiMargiela makes some sweaters in Rumania: beyond thcost factor, the company was able to nd plenty of peoplin that country who could sew wool sweaters well. MoFrench luxury brands’ shoes are made in Italy.Still, many luxury brands insist on the ‘made in’ factofor both cultural and strategic reasons. A country is morthan a place; it is a source of know-how and magic, whiccan create incomparability and symbolic authority. SomAustralian sparkling wines might taste like champagne an

could not be distinguished in blind tests, but they are nochampagne. Whereas with a premium strategy, the branseeks to reduce the wine to a mere sensory experienceexhibiting Robert Parker’s grade, describing the technologand efforts required to achieve this result – luxury branddo compete on intangibles. Wine becomes time, heritagculture and the human community, all embedded in aelixir. This distinction explains the mistake made bcounterfeit goods resellers: they say a Louis Vuittocounterfeit looks like the original, but it lacks the aura anextra value of owning an original. Only the original carriethe magic to build self-condence. As early as 193Walter Benjamin (2010) insisted on the value of thoriginal, even as technical reproductions of art becampossible. Thus, thousands of people wait in line to sefamous, original paintings at mass exhibitions.

Luxury brands have yet another reason to prioritizlocation: the more global the market, the more luxurbrands should localize themselves. This reasoning does n



Quality orientation

No brand would ever admit that it does not aim to providthe highest quality, at least for its price. But the notion oquality can also differ, or at least have differenimportance, across business models. By denitiopremium brands seek the gold medal for performance. the wine industry, these brands compete for the highesgrades from Robert Parker or victory in a juried tastincontest (such as the one that Grey Goose won, to warranits advertising claim: the world’s best-tasting vodkaLacoste’s early premium strategy led it to promote iiconic shirt on the basis of its exceptional durability, whicused 2 kilometres of cotton thread to produce the chic280-gram cloth. The premium car industry is judged by JPower surveys on customer satisfaction or car reliabilit

measured for each model of each brand.Beyond tangible measures, though, another questioarises, related to the delight created by possession: What quality? Can we compare a Porsche, which likely is thsingle car an owner might have and will be used to gfrom home to work to the stores every day, with a Ferrariwhich mainly stays garaged and is used only from time time? Driving a Ferrari has a dimension of folly and excethat characterizes people’s expectations of luxury as source of freedom, similar to art. In a Ferrari, the roar othe engine is part of the experience; it would be considera aw by German engineers working at Porsche or Audi.



we take away the noise, is it still a Ferrari? This questiowill become more than just rhetorical if, or when, aelectric Ferrari is launched. For many years, the intangibltied to Jaguar were the only solace an owner could take tforgive the car its unreliability. This dimension of folly unique to luxury; it is absent from the premium businemodel. Thus Baccarat crystal may have some aws thconsumers regard not as faults but as the handmadsignature by an artisan. Similarly, whereas an hautcouture dress will be hard to wash and require careful dr

cleaning, premium and masstige dresses need to be easy wear and wash.

Relationship to innovation

Because luxury is the embodiment of heritage and a bridbetween the past and future, innovation rarely is involvein a luxury strategy, though this tendency is changinsomewhat. In a recent Ipsos (2012) World LuxuryTracking Survey, the item ‘is most advanced in terms oinnovation’ received more votes among people interviewabout their perception of what a luxury brand should beThis perception appears symptomatic, in that to avoibeing trapped in an antique image, luxury brands musnever stop innovating. Chanel thus experiments with neconnected fabrics or new modes of production. Innovatiois the only way for the brands to unlock the power of thepast but still maintain vibrancy for today’s exacting



trendsetting clients. However, the brands’ heritage meanthe innovations cannot be radical. Luxury brands aim folong lives. In contrast, fashion creators take more risks iorder to capture the present and future. Masstige brandintroduce new stock-keeping units (SKUs) systematicalto encourage people to make repeat visits to their stores.

Furthermore, innovation goes beyond productsEverything a brand does can be a source of innovatioone-to-one services, CRM, store design, digitmerchandising, window dressing, communication ofin

and online. Take Dom Perignon champagne, for instancein 1961 – then the most expensive champagne of the timwith the name of a legendary monk – it appeared in thrst James Bond movie as an ally of 007 in his seductioenterprises. This radical innovation changed the whochampagne industry – a true disruption.

Discounts and super-sales

The luxury strategy is very strict about this policy: at LouVuitton there are no sales, super-sales or discounchannels. The price of a Louis Vuitton attaché case winever depend on the month or day or channel from whicit was purchased. Recall that luxury sells long-term valufashion sells short-term value, such that wearing thparticular shirt or ‘it’ bag is a sure way to look trendyBecause trendiness is ephemeral, the fashion businemodel has no alternative but to offer discounts on produc



as soon as the season or trend ends. Masstige usediscounts too, to be able to ll its stores again with newcollections. Thus 34 per cent of Ralph Lauren’s Urevenues come from its factory stores, where discounreach 40 per cent. To reduce the risk of cannibalizationCoach opens its agship stores in central locations but ifactory outlets outside town.

Licensing policy

Who manufactures Chanel watches? Chanel. Whproduces Chanel fragrances? Chanel. With a luxurstrategy, the brand can extend its scope and move to newproduct categories, but it remains the manufacturer ievery case. (The exception to this rule at Chanel eyewear, licensed by Luxottica – a decision regulardebated within the company.) Yet Ralph Lauren watcheare made by Cartier, while Ralph Lauren’s fragrances arproduced by L’Oréal. Fashion houses (eg Versace) anmasstige brands (eg M Kors) that seek market leadershuse their licences systematically. Masstige brands ubrand stretching and manufacture only a small portion otheir portfolios. Luxury brands reject both these strategiefor one simple reason: their greatest asset is their namLicensing means abandoning the fate of the name anreputation to the hands of some other party, which mayhave different goals. In a luxury strategy, full control oproduction and distribution must remain with the brand



At Hermès, it is the only way to know what the alligatoare fed. Quality in luxury settings cannot be limited to ansingle part of the value chain. In turn, the price of luxurbrands reects the assumption that they are responsible foanything going wrong, anywhere in the value chain.

Role of marketing

Luxury and fashion are creative industries that seek to b

surprising, rather than ocking to where their competitorgo – their aim is to stave off the boredom that can ensufrom the accumulation of goods. Both focus on thoffering, not the marketing. If a luxury house maintains marketing department, it generally uses a different terand assigns this department to sales analyses. Coacannually spends US$3 million on consumer surveys to out what consumers want. But as Tom Ford noted while hwas managing Gucci, marketing research only indicatwhat luxury brands already have instilled in peopleminds; his ‘job is to invent what they will like in 1months’. Premium brands also rely on consumer studies order to reduce their risks and evaluate the dimensions operformance most relevant for their clients.

Role of retail

‘Luxury is retail,’ says Arnault, CEO of LVMH, th



world’s largest luxury group with more than 60 brand(Forestier and Ravai, 1992). But it is hard to differentialuxury brands’ business models just by looking at thestores – which is probably why consumers tend to lump abrands with superb or impressive stores into the luxurcategory. Even Zara, the fast-fashion, low-price prototypeblurs the frontiers by opening agship stores on blockamidst luxury brands. Nor do Zara stores look like typicalow-price retail brands. They seek to boost the self-conceof buyers, making them forget the price.

Luxury brands sell icons and tend to think othemselves as religions. The community of believers mube permanently reinforced by the symbolic authority their cult brand, which is the purpose of agship storeconceived of as cathedrals (Dion and Arnould, 2011). Ithese cathedrals, products are disposed of as pieces of ardisguising the commercial nature of the luxury businesThe magic goes to work. Thus the fundamental role oretail in the luxury business model is to select the clienteThe doors of luxury agship stores generally remain closuntil opened by a door attendant; this symbolic obstacsignals selectivity and privilege. Furthermore, the luxubusiness model prefers directly operated stores franchises, so that clients come into real, one-to-oncontact with the brand, not with a subcontractor orfranchisee.

At the other extreme, masstige brands rely strongly othe impressions that the shop produces on visitors. EacRalph Lauren store thus is designed to make people belie



that Ralph Lauren interacted with glamorous stars of thpast, such as Cary Grant, Greta Garbo or Gary Cooper.The dozens of black-and-white photographs seem to provit. The brand tells an invented story that, little by littlecomes to be accepted as the ‘truth’. Each store alsprojects the sense of being in Ralph Lauren’s house, to thextent that shoppers can even buy the furniture ancarpets, as well as the clothes they display. To adopt thiEast Coast gentry lifestyle, clients need the entire panoplsold in stores at accessible prices. Although fashion bran

need selective distribution, they do not sell a dream in thway, so their stores are far less ornamented.Finally, with a premium strategy, automotive

showrooms, for example, allow buyers to see, touch ansit in each model. Unlike showrooms for luxury brandthese stores focus on product performance, not ounlocking the power of their legend. Audi City is ainnovative digital car showroom using state-of-the-atechnology. Visitors can experience every possibcombination of the Audi range. This experiencdemonstrates Audi’s cult of high technology.

Global competition between models ofluxury

We started this chapter by raising the issue of the elusivdenition of luxury. Having detailed how differen



business models operate in the luxury market, it becomnecessary to address the question ‘What is luxury?’ fromnew angle. Because luxury is a buzz word, which oftecreates value, many brands seek to embrace it. Beyond thcompetition, another battle rages that is deeper and omuch greater strategic importance: the competitiobetween visions of luxury, including the criteria anthresholds needed for a brand to qualify as luxury. Thdominant vision de facto excludes competitors frojoining the ‘luxury’ closed circle and its magic.

With their long history, European brands have madheritage central to inclusion in the luxury denition. Thstandard is a barrier to entry: it prevents newcomers fromentering their closed circle. The vision even imposes itsoutside Europe, such that masstige brands from the NewWorld (the United States) need to adopt it. Ralph Lauren ia recent brand (1967), but everything the brand does, fromthe product design and style to retail store decorationaims to simulate the brand’s history. Coach’s websitsimilarly reects the European-imposed demand fheritage, when it recounts, ‘Since 1941 Coach has designand created luxury leather goods in New York City.’

Yet because Ralph Lauren and Coach are US brandthey also express their home culture and promote a ‘luxurfor all’ vision, using accessible prices and discouchannels. Marc Jacobs, another US designer, even pleadfor a vision of luxury in which price is no longer an iss(though not while he was working for Louis Vuitton). ThUnited States thus nurtures a masstige business model,



exemplied by US brands such as Michael Kors anVictoria’s Secret.

The comparison of Italian and French brands alsreveals striking differences. For example, the missistatement of the Altagamma Foundation, which countmost Italian luxury brands as its members, is noticeabfor excluding the word ‘luxury’. Comité Colbert in Francinstead introduces the site by stating: ‘with a membershof 78 luxury brands, and the mission to implement thcollective policy of French luxury’. The words th

Altagamma uses are very significant: its members stand ofor their ‘innovativeness, quality, service levels, desigand prestige … and express the Italian culture’. Thus, excludes terms such as heritage, history, exclusivityprivilege, rarity or timeless, but it features ‘service’ (boto consumers and to customers, or the trade) and reference to Italianness. Collectively, it promotes ‘BranItaly’ as a highly cultural, stylish capital. In this sensItalian brands appear to be adopting a high-end fashiomodel, which may explain why the iconic Italian branPrada is increasingly produced in China. Relocalization less a problem for fashion brands than it is for a luxurstrategy. Unsurprisingly, the German luxury brands arealso adopting the premium business model, because thGerman technical culture obliges this shift. SimilarlKorean car brands that seek to trade up (Hyundai) adoppremium business models too.



ReferencesBain & Company (2014) The Luxury Market 2013, official report, ParisBenjamin, W ([1936] 2010) The Work of Art in the Age of Mechanical

Reproduction, CreateSpace Independent Publishing PlatformBVA (2013) Luxury and Sustainable Development Survey, ParisCorbellini, E and Saviolo, S (2009) Managing Fashion and Luxury Companies

Etas edition, ItalyDion, D and Arnould, E (2011) Retail luxury strategy: assembling charisma

through art and magic, Journal of Retailing, 87 (4), pp 502–20Forestier, N and Ravai, N (1992) The Taste of Luxury: Bernard Arnault and th

Moet-Hennessy Louis Vuitton story, Bloomsbury Publishing, LondonIjaouane, V and Kapferer, JN (2012) Developing luxury brands within luxury

groups: synergies without dilution, Marketing Review St Gallen, 1, pp 24–Ipsos (2012) World Luxury Tracking Survey, ParisKapferer, JN (2012) Abundant rarity: the key to luxury growth, Business

Horizons, 55 (5), pp 453–52Kapferer, J-N and Bastien, V (2012) The Luxury Strategy: Break the rules of

marketing to build luxury brands, 2nd edn, Kogan Page, LondonKapferer, J-N and Tabatoni, O (2011) Is luxury really a financial dream?

Journal of Strategic Management Education, 7 (4), pp 1–16Karpik, L and Scott, N (2010) Valuing the Unique, Princeton University Press

Princeton NJMoingeon, B and Lehmann-Ortega, L (2010) Creation and implementation of a

new business model: a disarming case study, M@n@gement, 13 (4), pp 266–97

Silverstein, M and Fiske, N (2003) Luxury for the masses, Harvard BusinessReview, 81 (4), pp 48–57

Teece, DJ (2010) Business models, business strategy and innovation, LongRange Planning, 43, pp 172–94



10The LVMH–BulgariagreementWhat changes in the luxurymarket lead family

companies to sell up?

This chapter was originally published as an article ournal of Brand Strategy, 1 (4), Winter 2012–13, pp 389402, co-authored with O Tabatoni.

On 7 March 2011 the world-leading luxury groupLVMH acquired a majority stake in Bulgari, a famouItalian jewellery house. The deal reects a majorrevolution that is occurring within the whole luxury sector:the transformation of manufacturers of exclusive productsinto creators of exceptional branded retail experienceFurthermore, as luxury companies expand their businesse



into Brazil, Russia, India and China (the BRIC countriesparticularly China, the demands of these huge new markeput great nancial and managerial pressures on familyowned companies. The purpose of this chapter is tanalyse the LVMH–Bulgari deal from interrelatemarketing and nancial strategic perspectives, and to showhy companies who insisted they would remain familowned have had to abandon this policy and join luxurgroups instead.

Introduction

Although rumours had been circulating beforehand, thItalian luxury industry was stupeed by the announcemeon 7 March 2011 that Bulgari, one of the most famouluxury companies, would join the world-leading luxurgroup LVMH. The main features of the LVMH–Bulgardeal (Bulgari, 2011) were as follows:

• The Bulgari family would abandon its controllingstake in Bulgari (152.5 million shares) in exchangefor 16.5 million newly issued shares of LVMH.

• This transaction would make the Bulgari family thesecond largest family shareholder of LVMH.• LVMH would subsequently launch a cash tender

offer for all other outstanding shares of Bulgari at thprice of €12.25 per share.



• Francesco Trapani – Bulgari’s former CEO – wouldjoin the board of directors of LVMH as arepresentative of the Bulgari family stake, togetherwith a second representative.

• Francesco Trapani would also head LVMH’senlarged watches and jewellery activities and becoma member of the executive committee.

This announcement raised questions about the long-termsustainability of family-owned luxury companies. Bulg

has given its answer to such questions by agreeing to tdeal in the rst place. But Hermès, another company awhich LVMH has taken aim (LVMH had a 20 per censtake in Hermès), has thus far ercely resisted all offefrom LVMH, be they friendly or hostile. It claims that wants to remain family-owned, a strategy that has beeextremely rewarding thus far, with Hermès ranked as onof the world’s most protable luxury brands. This chaptewill analyse the LVMH–Bulgari deal from interrelatestrategic and nancial perspectives, which concern thwhole luxury sector today.

Strategically, the deal is indicative of a major shift this occurring within the luxury industry, as luxurycompanies make considerable investments in retail in effort to acquire and maintain leadership in the leadinluxury markets of the future: the BRIC countries. This shis critical for many Italian luxury companies in particulaThese companies, typically family-owned anundercapitalized, may feel that their only option is to jo



luxury groups – today French but most probably Chinestomorrow.

The nancial perspective examines the nature of thdeal itself, especially the very high price/earnings (Pratio of 69. Why is the P/E ratio so high? Certainly, it ibased on the assumption that Bulgari will be morprotable as a member of a luxury group (LVMH in thicase) than as a stand-alone company.

The Bulgari acquisition: a model forfamily-owned luxury brands?

Bulgari is one of the agships of Italian luxury. Thirenowned 128-year-old company, descended from aancient family of Greek silversmiths, has created its ow

style, and has become a world symbol for high-enaesthetic jewellery. The fact that the Bulgari family decidto transfer ownership of the company outside the family extremely signicant. Until 2011 Bulgari always claimthey would remain family-owned. Such an ownershtransfer must have been the last option that the family evthought that it would consider. Certainly, the fact thatAntonio Belloni, the number two of LVMH, is Italian mahave eased the approach and the negotiationsNevertheless, the Bulgari family must have had veimportant reasons, including reasons related to thcompany’s economic prospects, to transfer ownership t



LVMH.The LVMH–Bulgari deal does not imply that all fami

luxury companies should sell to a consolidated luxurgroup. Hermès has refused all offers, both peaceful anhostile, from LVMH. Only by understanding themultifaceted rationale for the LVMH–Bulgari deal does become possible to draw conclusions for other luxurcompanies.

A rst reason for the LVMH–Bulgari deal concerns thItalian luxury sector as a whole: the flagship companies a

family-owned, and as such many of them are managed bpeople aged over 55 and even 65. Donatella Versace is her fties, as are Domenico Dolce and Stefano GabbanMiuccia Prada is in her sixties, as are Roberto CavallRenzo Rosso (Diesel) and Diego Della Valle (Tod’sGiorgio Armani is now 80, as is Karl Lagerfeld (FendThe question of the transmission of their companies is noa priority on their agendas. The difculty is that heirs anheiresses are most often unwilling to manage succompanies, leaving aside the main question of their owability or expertise (Ward, Schuman and Stutz, 2010). Thiis why it has been said in a recent article that Italy is fosale (Segal, 2010).

A classic solution is to hire outside talent, typicalfrom fast-moving consumer goods companies, so as instil modern management methods. As with any type transplant, however, these grafts are not always successfuOften, they give rise to legitimacy problems in thgovernance of the company. Within a family-owned luxur



company there is usually, on the one hand, an ofciaorganizational structure in which clear powers anresponsibilities are allocated to certain people. On thother hand, there are family members within the companyoften major shareholders, who feel that they have ainherited and inalienable responsibility to give their advion all strategic issues, even those that are clearly beyonthe powers and responsibilities that have been ofcialattributed to them. This is likely to create friction betweemanagers who have been hired externally, and wh

experience two systems of legitimacy within the compana managerial system based on credentials and know-howand an aristocratic system in which birthright as a fufamily member is synonymous with co-ownership of tfamily company.

A key question is why the Italian luxury industry hnot given birth to luxury groups such as LVMH, KeringGucci or Richemont. At least two reasons can be advanceThe rst is that the CEOs of famous Italian companies arentrepreneurs rather than organizers. Luxury bosses sucas Diego Della Valle (Tod’s), Francesco Trapani (Bulgarand Domenico De Sole (formerly of Gucci) haconsiderable talents in developing brands in foreigmarkets, but not in managing multisector groups.A second reason concerns leadership and nancipower. A group is not an association of peers. The ItaliaAltagamma Foundation is the association that representhe majority of the Italian luxury and fashion companieand brands. As such, it behaves as a common defender an



promoter of shared causes. In contrast, a group capitalizeon synergies (sourcing, purchasing, manufacturing, humaresources, legal, scal, servicing and institutional) anparenting benets to create greater value for shareholde(Ijaouane and Kapferer, 2012). For the member brandsthis implies that their growth and protability, while stilbeing recognized as their own, are greater within a grouthan they would be as independent entities. This issue hotly debated, and research has not yet demonstratewhether one of these strategies has a clear advantage ov

the other. The hostile reaction of the Hermès Group toLVMH’s silent acquisition of 20 per cent of its shares habeen accompanied by a erce claim that the companyfuture should be as a stand-alone company (or group) iorder to preserve its culture and identity, two essentiaelements of its business strategy and success.

Luxury transformation: from manufacturerof rare products to creator of retailexperiences

Why was it that Bulgari did not simply go to the stocmarket to nance its growth, or expand its existinnancing activities from licences (hotels, spas, restauranskincare, eyewear, etc)? The reason is that the problems faced were not restricted to liquidity and long-lastinnegative cash flows.



objects and possessions. Today, the luxury market expandnot by appealing to more people who are truly living luxury (the happy few), but rather by appealing to all thosmore ordinary people who deem that they have a righonce in a while, to some luxury, so as to bring somexceptionality into their daily lives. This insertion luxury can be achieved by dining at a three-star Michelrestaurant, or by savouring a glass of Dom Perignon at thbar of an elegant establishment.

For consumers, the search for an exceptional experien

starts at the retail level, and retailtainment (the collision retail and entertainment) today also affects the luxurindustry (Thomassen, Lincoln and Aconis, 2006Consumers like to visit luxury brand stores, which are noincredible, magical places deserving of a visit in their owright. The agship stores of luxury brands are particularlcaptivating. The world’s most famous architects – who acfor luxury brands much as Leonardo da Vinci did for KinFrançois I of France in 1517 – often design them.

Luxury focus has moved from upstream tdownstream. This explains the crucial importance odirectly operated stores (DOS) in the construction of aexciting experience for clients – a rst contact with luxu– worldwide (Dion and Arnould, 2011). This revolutiodirectly affects many Italian luxury houses, for a Zegnshop is not, by itself, very exciting – it is simply a plawhere one nds Zegna products. The same is true foBrioni, Kiton, Canali and Bulgari.

At the time of Bulgari’s acquisition by LVMH, it ha



thus far followed the principles of the luxury strategy. had integrated upstream by acquiring Crova, a historicallhigh-end jewellery manufacturer, among othersFurthermore, in order to extend the Bulgari brand inttimepieces, without licensing, it had also acquired twwatchmakers, Daniel Roth and Gérald Genta.

Following these acquisitions, Bulgari, like other luxucompanies, was faced with the problem of nancing thinternational and accelerated expansion of its DOnetwork in an effort to deliver a truly great experience fo

consumers. To do this, one needs talent, know-how andnancing capacities that Bulgari did not have. Theconomic crisis hurt the company, with revenues falling 1per cent in 2008–09 (Saviolo, 2011). In addition, thcompany had suffered from large increases in the price gold and gems, which, because of currency effectdamaged their current earnings. These prots were alsbadly affected by sales decreases for timepieces (down per cent) and accessories (down 27 per cent), lines thgenerally provide higher margins (Saviolo, 2011). Bbecause these lines were recent, less legitimate, and aimat less well-off clients, they suffered more than the oldemore well-established lines during the economic downturespecially in mature markets such as the United States aEurope.

Closing the gap with Cartier and Tiffany



In modern luxury, size is important. Luxury companiestart small, but they cannot stay that way if they wish tsurvive. In Asia, powerful is glorious. This is why tgrowth of Louis Vuitton has not yet been accompanied ba loss of prestige there. In terms of sales, at the time of thLVMH acquisition, Bulgari had overtaken Mikimot(which had €1 billion in sales), but lagged far behinTiffany and Cartier (which had sales of €2.5 billion and €billion respectively) (Saviolo, 2011). The same held trfor earnings before interest and taxes (EBIT) (with €7

million for Mikimoto, €330 million for Tiffany and €70million for Cartier in 2010) and net prot (€40 million foMikimoto, €200 million for Tiffany and €560 million foCartier). Beyond the rapid expansion of Bulgaridistribution, its future growth will be driven largely by thacquisition from LVMH of considerable know-how witregard to bags and leather goods, which have been weaareas for Bulgari thus far.

LVMH, on the other hand, had a weak watches andjewellery division. As of today, its 2001 deal with De Beehad not yet produced signicant results: only a few storwere opened. The addition of Bulgari’s €1 billion irevenues has changed the scope of this division, but thbreakthrough came from somewhere else – Bulgargrowth has been obtained by treating jewellery with thrules of fashion. In fact, Bulgari is the most fashionoriented jewellery brand. By offering former Bulgari CEFrancesco Trapani a position as the head of its watcheand jewellery division, LVMH is attempting to diffus



throughout the entire group, the unique Bulgari know-howin these areas, with the goal of enabling several LVMHfashion brands to develop soon their own jewellery lines.

In fact, growing luxury brand extensions seems to bthe norm now at LVMH. Louis Vuitton has decided tolaunch a fragrance, and Berluti will sell not only its iconshoes but also ready-to-wear clothes for men, just aBulgari the jeweller expanded into leather bags – althouthis was unsuccessful, as this brand had no credentials leather.

This acceleration of extensions has one cause: ChinOne cannot open exciting stores in the best locations bselling just one line of products: increasing store sinecessitates line extensions. Furthermore, Chineconsumers are discovering luxury. Unlike Western clientwho already attach a specic positioning and type oknow-how to each luxury brand, Chinese clients perceivbrands as names that add prestige to the fundamental gifgiving rituals that accompany all business and personrelationships. This is why, once the desire for luxurbrands has been created in China, it will be important tleverage it into many product lines. This is how branloyalty can be created and maintained – by providinclients with new reasons to visit the store.

China: the capital dilemma for family-owned luxury companies



For luxury companies, the future is China and the BRIcountries as a whole (Bain, 2011; Chevalier, 2009; XiaLu, 2008). These markets will help companies to diversitheir geographic risks and avoid overdependence on matumarkets or on Japan, which is in an economic anpsychological depression. In contrast, the BRIC countriare optimistic, the fuel of luxury indulgence. That said, odoes not penetrate China by opening a few stores here anthere. Louis Vuitton currently has 47 stores in China. Istarted in the capital cities, then moved to Tier 2 citie

(those that have more than 5 million inhabitants) and inow moving to Tier 3 cities (more than 2 millioinhabitants). Interestingly, Zegna has systematicallopened new stores in the same cities that Louis Vuitton hrecently entered.

The capital requirements involved in mastering remoend-user experiences through DOS are especially high China, where clients have grown accustomed to beincourted by the highest luxury brands. The experientiaeconomy is a reality there, as can easily be seen by visitithe new luxury shopping centres that open each month.

The experiential economy necessitates rethinkinlogistics, especially the management of local staff asalespeople who have contact with consumers. The classexport model, which was valid when luxury was aboumanufacturing highly crafted products, is now dead. Thwhole organizational model of the family company changing.

These changes raise the question of how growth in th



BRIC countries should be nanced in this era oexperiential luxury. The question is even more acute forjeweller, since in this industry buyers need particularstrong reassurance from a trusted brand. Although onmay become fashionable in a few months, it takes years create trust, and brands are trust, especially in thjewellery industry. They cut transaction costs by buildinreputation. It is for this reason that a diamond is foreverBut a brand also endows the product with an emotionamessage about oneself and, in the case of jewellery, abo

love.It is high time for jewellers to enter China, as a majodisruption will soon seize consumption in this market: cultural shift from non-branded to branded jewellery. Ifact, across the world, jewellery is underpenetrated bbrands, which account for only 12 per cent of the overamarket (Carcano and Ceppi, 2010). The ‘democratizationof diamonds diminishes the rarity effect, and this must bcompensated for by the charisma and trust endowed bbrands. Former luxury brands such as Mauboussin havbeen forerunners. Although Mauboussin keeps its store othe highly exclusive Place Vendôme in Paris for matters prestige, the brand’s strategy is to capture and meet thgrowing demand for low-cost jewellery. On one hand, leverages the resilient awareness of a brand name bugradually over the last 160 years, while on the other handit outsources its production to low-cost areas.

Of course, there is no comparison between Bulgaridecrease in trade and Mauboussin’s deliberate trading



down strategy; however, both will capitalize on this majoshift towards branded jewellery. This is why LVMHneeded Bulgari – and vice versa. LVMH did not have high-end jewellery brand in its portfolio to compeagainst Cartier and Tiffany.A total of 88 per cent of the world’s sales of unbrandejewellery are made in China (Carcano and Ceppi, 2010). follows that size is necessary to compete successfullythis market. Operating in China requires not only a larginvestment (in order to build and manage a DOS network

but also a long-term one (in order to build brandawareness and trust). This is a real problem for Italiafamily brands, and for family luxury brands generallyThese rms are typically undercapitalized, and the familydesire to maintain full control is often a clear limitatioThis raises the critical question of where the requirecapital may be found.

In order to grow in China, Zegna created a 50/50 joinventure with a Chinese group and began delocalizing moand more of its production, thereby twisting one of thcore principles of a pure luxury strategy as dened bKapferer and Bastien (2012). Prada went public on thHong Kong stock exchange, a place close to its targmarket: mainland China. Hong Kong welcomed this luxustar with open arms, and without posing too manyquestions. It was the ideal place to raise brand awareneamong the Chinese political elite and to thereby gainstitutional support. In China, it is important forcompanies to demonstrate that they give some of th



In contrast, luxury brands are completely dened btheir identities – they have no positioning (Kapferer anBastien, 2012). Heritage, history, style, roots, values anculture all contribute to such identities. It follows thaluxury brands cannot be transferred from one company tanother without losing part of their identities, just as treeoften die when moved from one garden to another. Luxurbrands thrive in an eco-cultural system – this is thehumus, the underlying source of identity and future growtthat is of crucial importance and understood by all seriou

gardeners.This is why LVMH always maintains brands as theare. It wants to preserve the intangible and extremelfragile parts of their identities. Pernod Ricard Groufollows a similar strategy. It bought the prestigious cognabrand Martell from Seagram, an American companySeagram had managed Martell from the group’headquarters in New York before delocalizing it so as tbe closer to the brand’s target markets. However, afteracquiring Martell, Pernod Ricard sent it back to Cognacto its roots. This strategy worked. Whereas Martell walosing market share under Seagram’s management, it now growing rapidly under Pernod Ricard’s governance and is catching up with Hennessy.The same holds true for money. Receiving money froa hedge fund is not the same as receiving it from LVMH oanother luxury group, because luxury groups understanthe principles of a luxury strategy. Their money comewith skills, expertise, synergies, talents, institution



support and, above all, respect for time. No nancial funcan grant the time needed to build prestigious brands, sucthat Bulgari needs to make itself as prestigious as LouVuitton and more appealing than Cartier.

The LVMH–Bulgari deal has granted Bulgari a uniquopportunity to obtain talent and nancial resources whilmaintaining its identity and simultaneously benefiting frobeing within a group that reinvents luxury worldwide eacand every day. The deal also solves the succession problemwith Francesco Trapani, the former CEO, becoming th

head of LVMH’s watches and jewellery division.Meanwhile, the Bulgari family, by becoming the seconfamily owner of LVMH itself, is losing neither iindependence nor its personality. It is joining a largedestiny, while keeping an eye on, and some degree ocontrol over, its eponymous brand.

As Bulgari reaps these benets, LVMH is succeeding well, by developing its watches and jewellery divisionwhich was lagging behind Tiffany and Cartier – and, moimportantly, by capturing the world’s new and growingdemand for branded jewellery.

It is the very specic win–win elements of this deal thmake it emblematic of the radical evolution of luxubrands. And it is only through these win–win elements ththe deal can be considered a model for other famicompanies to follow. Accordingly, many Italian familcompanies, who have not obtained such win–win elemenin proposed deals, have ultimately decided not to sell thefamily assets (Carnevale-Maffè, 2011).



The price of Bulgari: too high, or anaccurate measurement of the financialdream?

Turning to the nancial perspective, many observers wevery much impressed by Bulgari’s P/E ratio of 6(Bforbank, 2011). Was this ratio the result of irrationabehaviours, especially LVMH’s craze? Are such ratiocommon in the luxury industry? Or does such a high P/

ratio differentiate Bulgari as a special gem worthy of asky-high valuation? More generally, what elements anwhat strategic intent, if any, would justify such aapparently extraordinary P/E ratio? These are the questionthat we would like to answer in the remainder of thichapter.

The P/E ratio is a measure of the price of a compan(its market capitalization) relative to its earnings (usualcomputed as net income after tax). Investors often use thmeasure to evaluate whether the valuation of a company expensive or not vis-à-vis its protability. In other wordthe P/E ratio tells us how much investors are willing to pfor each euro of current prot, and thus how many yearthey are willing to wait to get back their investment. high P/E ratio indicates that investors are so enthusiastabout a company that they are willing to pay a high pricfor it relative to its current earnings.

It is important to note that in the P/E ratio, price andearnings are two very different concepts. On one hand



‘earnings’ refers to the net income that was obtained ovthe previous year (and which by default is expecteannually within the foreseeable future) (a forward P/ratio is typically calculated using earnings estimates for tnext 12 months; these estimates are usually derived frothe projections of a group of analysts). On the other hand‘price’ refers to the market capitalization, whicsummarizes expectations regarding all future earnings cash ows) that the rm will generate throughout thremainder of its life. Whereas ‘earnings’ is an accounti

measure, ‘price’ is based on expectations about thcompany’s future results. As has been argued at lengtelsewhere, price is about ‘dreams’ (Kapferer and Tabaton2011).

Dreams are about two main elements that impact thrm’s value (ie value drivers): protability and growthWithout any foreseeable protability, a rm has no valueIncidentally, some people wonder how young, moneylosing start-ups sometimes achieve incredible valuationThe answer is simple – investors are convinced that tcompany will generate positive earnings in the future, evthough it may pile up losses during the ramp-up phase.

The second value driver is growth, which is usualmeasured as sales growth. As mentioned before, growtwithout protability yields no value. However, once thrm passes a threshold level of protability, growthbecomes the main value driver. For nancial specialist‘enough protability’ means a rate of return thacompensates investors for the risk that they take (Stewar



2003). In summary, a rm’s P/E ratio will depend on threlationship between observed earnings and investorexpectations about future profitability and growth.

We should therefore be very careful when we implicitcompare rms using their PE ratios. The P/E ratio is comparison between results and expectations. It followthat a high P/E ratio can be achieved when bad results aachieved within a context of reasonable dreams, or whereasonable results are achieved within a context of abovaverage dreams. In order to fully appreciate th

signicance of a particular P/E ratio, it is therefornecessary to carefully examine both the results that havbeen achieved and the dreams that dene the context. It therefore useful to examine data that has been collected opublicly traded firms in the luxury sector.

Table 10.1 presents the P/E ratio and protability oseveral luxury rms for 2012. We collected trailing 1months’ (TTM) protability data from the ThomsoReuters website (Thomson Reuters, 2011). Protability measured as net prot margin (ie net income after tadivided by revenues).

We have also collected the same information for seversuccessful rms in other industries for 2012, as shown Table 10.2. This information does not, by any measureconstitute an exhaustive benchmark. It does, howeveprovide a good means of comparing the P/E ratios anprot margins of these luxury rms with a group of welknown firms.



Third, within the luxury sample Bulgari, HermèShiseido, Prada and Estée Lauder are in a league of theown, with P/E ratios above 30. But when assessing thprotability of these rms, Shiseido and Estée Laudshould be analysed differently from the others. Therelatively low protability (2.4 per cent for Shiseido an8.7 per cent for Estée Lauder) seems to indicate that thehigh P/E ratios are derived from below-average earningThis is especially true for Shiseido, considering the madifficulties that Japan encountered in 2011. It is likely tha

once these rms generate better results, approaching thoof Ralph Lauren and Tiffany, their P/E ratios will return tbetween 20 and 30.

In contrast to Shiseido and Estée Lauder, Prada’protability is more in line with the industry and shoulthus fetch a P/E ratio comparable to Ralph Lauren oTiffany. It follows that Prada’s very high P/E ratio of 3can only be justied by strong growth expectations. Thesexpectations may be attributed to its recent IPO in HonKong, which should provide the company with the fundinto back strong growth.

The situation of Hermès is different still. The markevalues its above-average protability of 20 per cent withP/E ratio of 51. When comparing Hermès to Google anApple, which have similar protability, Hermès’extremely high P/E ratio implies extraordinarexpectations. The only explanation is that nanciamarkets expect that Hermès will maintain its protabilitwhile growing at a very fast pace. Clearly, Hermès make



financial markets dream.

High growth assumptions: no brandequity dilution

We are now left with Bulgari and its P/E ratio of 69. Givethat its 7 per cent protability is comparable to that oEstée Lauder, one would expect Bulgari to have a P/E ratin the 30s. It is therefore clear that there must be more tthis story. The only possible explanation for such stratospheric P/E ratio is that nancial markets havexceptionally high expectations for the company’s futugrowth. Growth expectations of this magnitude imply thexistence of deeper expectations regarding strategchanges within the company that will enable such grow

and perhaps increase protability as well. Will sucstrategic changes occur at Bulgari under LVMHtutorship? One indication that they will is a promise thaBulgari’s CEO, Francesco Trapani, made in the followinstatement about the LVMH–Bulgari deal: ‘Our entrancinto LVMH will allow Bulgari to reinforce its worldwidgrowth and to realize signicant synergies.’ If such changdo not occur, it is likely that Bulgari’s P/E ratio wirapidly decrease to the 30s range, and perhaps even belowonce its normal profitability has been established.

All of this raises a key question: What was the impaof the LVMH–Bulgari deal on LVMH’s share price? Di



the market think LVMH paid too much? Bloomberg noteat the time that the cost to LVMH including stock optionand the purchase of a convertible bond amounted to a totaof €4.3 billion.

It is important to note that LVMH’s acquisition ofBulgari was nanced by an issuance of 16.5 million neshares. Initially, investors wondered if a dilution of abou3 per cent of the rm’s earnings per share (EPS) woudecrease LVMH’s value. After all, when a rm issueadditional shares its earnings are then divided among mo

investors. Nevertheless, one should be cautious wheconsidering dilution. Although issuing new equity wdilute current EPS, it is important to keep in mind that rm’s value is the sum of its future cash ows, not its paones. It follows that the key question is: What effect wadditional nancing have on the rm’s future earnings? Toanswer this question, it is necessary to examine how thnew funds will be invested.

If a company issues new shares but is not able tconvince the market that those new funds will be properused, then there will indeed be a dilution effect, and thshare price will decrease. But if the market instead believthat those new funds will generate sufcient cash owthe rm’s share price may increase even as its EPdecreases. Within hours of the announcement, analystagreed that LVMH’s costs in the acquisition would bmoderate – nine months of cash ows according tCheuvreux analysts – while the acquisition would giLVMH a signicant competitive advantage. By the end



the day, LVMH’s share price rose by €3 (2.7 per cent), aclear sign that the market considered the operation arelutive (the opposite of dilutive).

In the ensuing year, as Figure 10.1 shows, LVMH(shown on the graph as a black line) has outperformed thCAC 40 index (dotted line), that is to say, the average othe 40 highest market capitalizations on the Paris stocexchange. Also, when comparing LVMH Group to PPRGroup (the owner of Gucci and other luxury brandsshown on the graph as a broken line), it seems that LVMH

has not suffered as a result of the acquisitions. But it important to keep in mind that Bulgari represents only per cent of LVMH’s sales and thus can have only a limiteimpact on LVMH’s share price. Looking next at Bulgarishare price over the same year, as shown in Figure 10.2, seems that the market has not signicantly revised iinitial estimates.

In summary, Bulgari’s P/E ratio is clearly greater thathose of its peers, indicating strong expectations of highprotability and accelerated growth. The Bulgaracquisition does not appear to have had any dilutive effeon LVMH, thus supporting initial views that synergies anLVMH’s umbrella would contribute to Bulgari’profitability.

Conclusion

This chapter has addressed the question of the long-ter



sustainability of family-owned luxury companies. As whave seen, they have to transform themselves fromanufacturers of rare products into creators of exceptionbranded retail experiences. This means managing paradox: at all times they have to maintain their valuetheir excellent craftsmanship and their ties to a faminame, but must also go beyond their traditional clients tconsumers looking for retailtainment. The latter impliehuge investments in DOS, brand building and achieving tnecessary size to exist in the high-growth markets. Pro

can rarely nance such massive investment. Only the mosuccessful groups – such as LVMH, Richemont, HermèPernod Ricard and Estée Lauder for public rms, but alsChanel, Armani or even Lacoste for the family ones – aable to generate enough cash ows to nance theiexpansion; others will have more difculties. This will especially true for rms that started their globalization tolate, those that did not have their brand established (wknow how much it costs to build a luxury brand) or thosthat have made unsuccessful strategic choices (this was tcase for Bulgari, which had some years of negative caows because of failed diversication; The Economi2011).

FIGURE 10.1 Stock returns in 2011: LVMH vs PPR andCAC 40



SOURCE http://fr.finance.yahoo.com/ [accessed 7 November 2011]

FIGURE 10.2 Bulgari share price in 2011

http://fr.finance.yahoo.com/



SOURCE http://fr.finance.yahoo.com/ [accessed 7 November 2011]

For these latter rms only nancial markets will bable to provide the necessary funding. It still remains fthem to choose between doing it alone or in a partnershipusually with an industry leader (LVMH, RichemonSwatch, Kering, etc). We have seen with Bulgari the limof the rst option: they went public in 1995 but theicontinuous nancing needs constrained their ability texpand. Also, the cost of money is higher for smaller rmand their access to funds is more limited than for larggroups. The family’s wish to retain the majority ownershiwas another constraint: diluting the family ownershi

http://fr.finance.yahoo.com/



without diluting its fragile and unique charisma. The valuof a luxury brand lies in this precious intangible. Thus faLVMH has succeeded in not focusing too much on grousynergies, thereby preserving the independence of the brain its portfolio (Ijaouane and Kapferer, 2012). But in itnewly enlarged watch and jewellery activity, the questiois: Will it still be able to resist the temptation? The answto that question will probably inuence the decisions oother family-owned luxury rms to either accept or refuthe offers of industry leaders.

ReferencesBain & Company (2011) Perspectives on World Luxury Market, Bain strategic

reports, ParisBforbank (2011) [accessed November 2014] Avec Bulgari, conference press

release, 7 March [Online] http://blog.bforbank.com/bourse/2011/03/07/lvmhbijou-bulgari-luxe Bulgari–LVMH

Carcano L and Ceppi C (2010) Time to Change: Contemporary challenges forhaute horlogerie, Egea Editions, Milano

Carnevale-Maffè CA (2011) Why Italian companies are selling their familyjewels? Via Sarfatti, 25 April

Chevalier M (2009) Luxury China: Market opportunities and potential, Wiley,Singapore

Dion D and Arnould E (2011) Retail luxury strategy: assembling charismathrough art and magic, Journal of Retailing, 87 (4), pp 502–20Ijaouane V and Kapferer JN (2012) Developing luxury brands within luxury

groups: synergies without dilution, Marketing Review St Gallen, 1, pp 24–Kapferer JN and Bastien V (2012) The Luxury Strategy: Break the rules of

marketing to build luxury brands, 2nd edn, Kogan Page, LondonKapferer JN and Tabatoni O (2011) Are luxury brands really a financial dream

http://blog.bforbank.com/bourse/2011/03/07/lvmh-bijou-bulgari-luxe



Journa o Strategic Management E ucation, 87 (4), pp 1–16Marafioti E and Saviolo S (2010) The Zegna group, case number 086/07,

Bocconi, MilanMultpl [accessed 30 August 2012] [Online] http://www.multpl.com New York

Times, For Bulgari, LVMH deal paves the way to growth, 7 MarchPassariello C (2011) Prada is making fashion in China, Wall Street Journal

Fashion, 24 JuneSaviolo S (2011) Report about Bulgari Group, Bocconi School of Managemen

Reports, MilanSegal D (2010) Is Italy too Italian? New York Times, 31 JulyStewart S (2003) How to fix accounting: measure and report economic profit,

Journal of Applied Corporate Finance, 15 (3), Spring, pp 63–82The Economist (2011) Keeping it in the family, 10 MarchThomassen, L, Lincoln, K and Aconis A (2006) Retailization, Kogan Page,

LondonThomson Reuters [accessed 8 November 2011] Bulgari SpA [Online]

http://www.reuters.com/finance/stocks/overview?symbol=BULPY.PKWard, JL, Schuman, A and Stutz S (2010) Family Business as Paradox, Palgra

Macmillan, New YorkXiao Lu, P (2008) Elite China, Wiley, Singapore

http://www.reuters.com/finance/stocks/overview?symbol=BULPY.PK

http://www.multpl.com/



11Developing luxury brandswithin luxury groupsSynergies without dilution?

This chapter was originally published as an article Marketing Review St Gallen, 1, 2012, pp 24–29, coauthored with V Ijaouane

The recent acquisition of the famous luxury jewellBulgari by LVMH, the world’s leading luxuryconglomerate, foretells a wave of consolidations. In ordto grow, many family-owned luxury brands will joiexisting conglomerates or form new groups. This chapteexplores the value created by the corporate level of luxugroups. Their level of integration is moderate, reectingabalance between search for synergies and preservationof the autonomy of luxury brands, essential to sustain theirsymbolic power.



Luxury concentration in question

In most industries, concentration has been a trend, witmajor groups leading the sector. The benets of size (big beautiful) are well known. The luxury industry itselalthough attached to images of independent family brandis no longer the exception. LVMH originated in 1987 fromthe merger of a leather company with a cognac anchampagne house and is now home to more than 6brands. More recently, PPR (now called Kering), originala wood and retail conglomerate, added a luxury arm witthe purchase of the Gucci Group, with the ambitious goto make it the world’s number-two luxury groupRichemont (Cartier) and Prada (Miu Miu) are othefamous examples.

Some doubts have been expressed about the validity

such concentration. Rigby, D’Arpizio and Kamel (2006argue that: ‘the usual benets of being big – leverage wisuppliers, shared marketing and administrative expenseand high volume, strategic customers – just do not seem apply for most multibrand luxury players’. They add ttheir critique some disturbing facts. In the luxury industrysingle-brand companies actually grew 60 per cent fastfrom 1994 to 2004, compared to brands owned by themultibrand conglomerates, without showing weakeprofitability (Rigby, D’Arpizio and Kamel, 2006).

It has been highlighted that luxury brands could be idanger when integrated with and managed by non-luxur



groups (eg Jaguar and Ford) (see Kapferer and Bastie2009). But why should luxury groups be a special casBecause, unlike FMCG brands (Kapferer, 2012), the branequity of luxury brands depends on their very higsymbolic power. When a change of ownership takes placthere is therefore a risk that stakeholders will loscondence in the sustained authenticity and inheriteculture of the brand.

How luxury groups growAs luxury groups have transformed into listed companiethey have come under growing pressure to exhibit growgures while simultaneously maintaining their high branequity. However, the feelings of privilege that they creaare threatened by pressures to increase penetrationdiffusion, trading down, and the introduction of so-calle‘accessible luxury’ options (Kapferer and Bastien, 200De Sole, former CEO of Gucci Group, puts it straigh‘When you are a public company and you want to continuto create value for your shareholder, you have no choicYou cannot go downmarket because of the effect omargins and protability’ (Galbraith, 2001). The recenwave of acquisitions has been enabled by the desire many well-known family companies to give up theautonomy and by the search for synergies.



Theoretical background: how groupscreate value

Unlike all other sectors, luxury groups cannot be baseonly on cost-reduction motives. If they were, how wouthey create value? A review of diversication theohighlights that the performance of multibusiness rm(MBF) is related to their capacity to generate corporaeffect rather than industry or business effects (BrusBromiley and Hendrickx, 1999; Rumelt, 1991). Thcorporate effect can be dened as value creation at thcorporate level, which corresponds to both the verticrelationships between the corporate centre and thbusinesses, and the horizontal relationships between thbusinesses (Knoll, 2008).

Search for synergies is another goal of groups. Syneris the effect that the combined return of two or more parttogether is greater than the sum of the return of each parindividually. Usually the study of synergies has belimited to efciency-focused synergies or hard synerg(economies of scope). Following Knoll, we integrate it ina more global scheme: operative synergies, market pow

synergies, nancial synergies and corporate managemesynergies, which are respectively derived from leveragoperative, market power, nancial and corporatemanagement resources across the businesses (see Figu11.1).



Research objectives and methodology

A brand joining a group has to add value to the groupReciprocally, the group has to add value to the brand. Buwhat is the reality of this parenting advantage with whicluxury groups are said to endow their brands? As Moorand Birtwistle (2005: 257) put it: ‘Little, if anyconsideration has been given to how luxury branconglomerates secure what Goold, Campbell anAlexander (1994: 13) described as “parenting advantage” those strategies, structures and processes whereby th“parent works through its businesses to create value”.’ Fothem, luxury brand development and sharing of grouresources are the main sources of parenting advantage thluxury groups can create. Is this really the case?

FIGURE 11.1 How luxury groups create added value



To answer this question, we engaged in acomparative/collective case study. As mentioned earlie



three major conglomerates dominate the luxury sectoLVMH, PPR-Gucci (now Kering) and Richemont-CartieAll of them are multibusiness rms in the sense that theown different brands and offer a very diverse group oproducts within the luxury industry – fashion and leathegoods, watches and jewellery, fragrance and cosmeticpens, wines and spirits. These cases are selected becauthey are representative of luxury conglomerates. Fifteinterviewees were selected following a competence arelevance criterion. We met with at least two interviewe

from all three companies investigated in the collective castudy, including the chief nancial ofcer of each oneSemi-structured and open-ended interviews were used; tfindings are explored below.

Findings of the transversal analysis

Operative synergies

The rst nding is that operative synergies are not aimportant as they are in other consumer goods industrieHowever, we found that efciencies and growth synergido exist and contribute to the corporate effect. Wefurthermore found that efficiency synergies, by which valis created through economies of scope, result from thpooling of common resources. These can be split into twdistinct parts: resources required for production an



resources related to support activities.In the luxury industry, support activities can usually b

pooled without much concern, but pooling productioactivities is a different matter entirely. As we have showthis is due to the nature of luxury, and specically to thimportance of having a distinct brand identity. For luxury brand, integrating production with other brandcould potentially damage its image as well as its integrin the minds of its customers. However, we saw thadepending on the product category, numerous domains ca

generate efciency synergies: research and developm(R&D) in fragrances, purchasing in leather, sourcing anmanufacturing in watches (see Figure 11.2).

The synergies regarding support activities are mucmore obvious and generalized across all investigatcompanies and businesses. These synergies simply cofrom the possibility to share costs in functions that are nointrinsic to the luxury product. In the luxury industry theare systematically present at two different level1) centralized support functions (for operations impactinthe whole brand) operated as shared centralized service2) regional support functions (for operations impacting thbrand in a specific area) operated as support platforms.

The latter represent an opportunity for brands tosuccessfully combine the efciency of centralization athe need for local responsiveness. Efciencies in regionsupport functions primarily come from logistics, includicross-docking, warehousing, human resources, IT anmedia buying.



Regarding logistics, distribution and deliveries are oftcentralized within timepiece brands. Similarly, thdistribution in spirits is fully integrated. The use ocommon regional warehousing platforms has beegeneralized across different product categories. Ftimepiece brands, the pooling of after-sales services ismajor source of synergy, as these brands utilize commoregional technical centres to ensure after-sales service.

Furthermore, there are a few functions or shareservices that generate synergies that are not always poole

depending on the level of integration. Real estate (stodevelopment), IT and ERP, regional marketing (especialfor timepieces), media buying, human resources andiverse back-ofce operations are generally organized onproduct category basis.

FIGURE 11.2 Degrees of synergy within luxury groups



Within operational synergies, the frontier betweeefciency synergies and growth synergies is loose. Thisillustrated by the transfer of know-how, which generateboth efciency synergies and growth synergies. On ohand, transfer of know-how allows the brands to sharbest practices that help to reduce various cost



(manufacturing, contract manufacturing, licensingprocesses, etc). On the other hand, it also results in otheopportunities, such as allowing brands to stretch theiexisting product offering. Timepieces being offered bfashion brands provide good examples (Tag Heuer anLouis Vuitton, Boucheron and Gucci, Richemont anRalph Lauren). Furthermore, transfer of know-how caenable brands to expand more easily and rapidly in nemarkets, due to the existing knowledge and stakeholderrelationships in local luxury markets possessed by tho

brands in the portfolio that already operate there (eLVMH access to the US fragrances market thanks to BlisHard Candy, Urban Decay). Finally, brands can exchangabout market trends across different businesses antherefore better adapt to current demand or simply have aenhanced vision of the luxury market.

In addition to the transfer of know-how, we haveuncovered through this multiple case study another majosource of cross-business growth synergies: access to scaresources, which can be divided into:

• access to raw material such as precious stone orspecific fabrics or grapes (eg the instrumental

purchase of wine domains);• access to specific technology, components orproducts such as movements in watches (eg GucciGroup’s stake in the Sowind Group – Girard-Perregaux and Jean Richard brands – and purchase oSergio Rossi and its manufacturing plant, or LVMH



purchase of Roger Dubuis and its manufacturingcapacity).

oint development platforms are relatively insignicant f

luxury brands, because this kind of synergy is often seen highly technological products, and because one result the dream function often being superior to the utilitfunction for luxury products is that these products armore about creativity and affection than about innovatioand perfection (Kapferer and Bastien, 2009). Finally,

should be noted that typical soft synergy opportunities (ecross selling, lead sharing, cross-business bundling), as was joint marketing activities (eg joint image campaignjoint customer loyalty programmes) and extended umbrelbrands, are not relevant or are highly marginal in thluxury industry, due to its specic relationships vis-à-vits customers and the fact that sales and merchandisinteams are kept autonomous.

There are two domains in which non-luxury groupusually realize synergies that are not relevant in the luxuindustry: creation and distribution. In luxury, exclusivdistribution is the ideal for selling the singularity of thbrand experience. Creation and distribution are usually no

organized to create synergies, because the risks that thegenerate (eg value destruction by damaging the branequity of each luxury brand) are too high. Only thPoltrona Frau Group created its own multibrand agshistores in the BRIC countries in order to break even fastewith mixed results.



There are also a few functions or shared services thgenerate synergies that are not always pooled, dependinon the level of integration: real estate (store developmenmarketing and diverse back-ofce operations. Finally, ithe watches business, the pooling of after-sales services imajor source of synergy.

Market power synergies

When Knoll (2008) created his classication of crosbusiness synergies, he acknowledged that, due to limitempirical evidence, market power synergies might speculative because of national anti-trust laws thaincreasingly hinder and jeopardize the legal realization market power synergies. We agree on this word of cautionas in our specic case market power synergies have provnot to meaningfully contribute to the corporate effecHowever, we also suggest two additional reasons texplain why their realization is difcult in the luxurindustry. The rst additional explanation is that in theluxury industry companies do not compete against eacother in the same manner in which rms compete in othconsumer goods industries.

The second additional explanation is linked to thdesire of most conglomerates not to impose their newbred brands on their business partners (eg wholesalers) anthus not to leverage their existing ‘market share’. This due to the fact that the long-term risks of damaging th



star brands are quite high, both in terms of image anregarding their own power, which is directly harmed if thbrands pushed forward do not perform.

However, we also identied two distinctivopportunities for value creation. First, luxury malls armultiplying throughout the BRIC countries. No luxurmall can be created without LVMH. With their portfolioof 60 brands, LVMH alone can make a luxury mall starand grow. Second, these conglomerates have one or severleading brands within their portfolio through which the

enjoy bargaining power vis-à-vis their differestakeholders such as wholesalers, department stores omall managers (for the choice of the best locationjournalists (fashion or luxury magazines), and media spapurchase.

Financial synergies

This point is often ignored yet matters greatly. Our studshows that all luxury conglomerates have implementedpooling of nancing resources. This means that the brandno longer have to negotiate their credit lines on their owbut rather receive funds according to a budget approved beach part, the brand and the corporate level. This allowthe brand to enjoy easier access to credit, which can bvery important, considering that brands in ramp-up oftend it difcult to get the nancial resources that they neeto expand and reach their very high break-even poin



Moreover, brands are granted much better conditions fothese loans, as the parent often has a better risk prole, ait is more diversied and larger. Finally, someconglomerates are cash rich and often only use debt raise their leverage and the return to their shareholders.

We also identied the possibility for brands iconglomerates to protect themselves from currencuctuations by pooling currency hedging at the corporalevel. Doing so allows the brands to fully concentrate otheir operational management, and to have a strong degre

of condence that their performance will not be greatlendangered by currency fluctuations.Eventually, thanks to a legal integration of loca

afliates into the legal entities of the parent and othesophisticated legal schemes, the brands can have aoptimized legal structure.

Corporate management synergies

These are often neglected in synergy studies, but our stushows that they are of prime importance, at least in thluxury industry. The different corporate synergies arderived from corporate capabilities, corporate initiativecorporate planning and control, and corporatedevelopment.

In the luxury industry, corporate parents create valuwhen parenting brands by bringing specic expertise distribution (eg shop experience, selective distributio



internet distribution, licensing and market intelligenceConglomerates have also displayed particular knowledand prociency in luxury branding (ie helping brands tposition themselves as true luxury brands).

They have also every so often demonstrated signicant ability to turn around ailing brands – changmanagement. Last but not least, the management of talenseems to be a signicant vector of value creation amonmultibrand companies. Groups have been leveraging thpotential of their talents across brands by offering them

attractive career paths. Luxury groups offer many mortalent development opportunities than do most singlebrand companies. Indirectly, these human resource (HRstrategies help to attract, motivate and retain the bestalents in the luxury groups. This is a major differencwith family-owned companies.

We found that corporate centres can, in additiongenerate value in HR executive management: wioperational top management by rst allowing them tshare high-level best practices and ideas through internuniversities (such as LVMH House in London) and then bstafng them strategically at key positions across thdifferent brands. These key managers represent a vescarce resource, as they need three complementary skills competences that are fairly exceptional: rich understandinof the product, commercial and nancial skills, as well the ability to manage the creative leader(s) of the brand.



Implications for growing luxury brandswithin groups

Synergies in luxury groups are not so much about costGiven the industry’s high margins, cost reduction logic not needed and cannot be done at all prices, and eversearch for synergy must be conducted carefully so as not harm the brand. Usually, synergy is a word that is badlconnoted from the employees’ point of view, but in thluxury industry managers themselves are willing to dewith the topic of realization of synergies with much carremaining concerned with the potential drawbacks of sucsynergies.

All activities that have contact with the end client sholimited synergy potential and this is conrmed insofar brands are expanding their directly operated networkProduction, however, seems to follow a different logiWhile production used to be fully autonomous, this mighchange and become dependent on customer perceptions.

Regarding the governance debate between autonomand centralization, we believe that with respect to thidentity, culture and strategy of each brand, an

organization by business branches can provide a powerfinfrastructure and shared resources to the brands of thdivision, especially the weakest or smallest. Each ent(also called house, or maison) acts as a virtual companwith its own CEO and its own head creative designer, bothaving a real ‘brand custodianship’. The difficulty comes



nding the right balance between research for synergiand autonomy of the brands. We would like to warncorporate managers that cross-business synergies should implemented carefully and that ‘the more synergies thbetter’ is a very dangerous point of view. Luxury brandsymbolic capital is fragile. It is essential for them to ketheir roots and ‘freedom within a framework’.

When too many synergies are put through, brands tento underperform, as sharing resources can reduce brandsense of accountability for the performance of these par

of their activity. However, entrusting a full P&Lresponsibility to brands driven by corporate objectivjeopardizes coordination and collaboration mechanismEventually, we draw corporate managers’ attention thuman capital and knowledge management (includinsharing of best practices), two indisputable strengths thgroups should cultivate so as to outperform their peers oa long-term basis.

ReferencesBrush, T, Bromiley, P and Hendrickx, M (1999) The relative influence of

industry and corporation on business segment performance, StrategicManagement Journal, 20, pp 519–48.

Galbraith, R (2001) Multibrands: a lucrative strategy for the luxury Italianfashion, International Herald Tribune, 2 March

Goold, M, Campbell, A and Alexander, M (1994) Corporate Strategy: Creatinvalue in the multibusiness company, Wiley, New York

Kapferer, J-N and Bastien, V (2009) The Luxury Strategy: Break the rules of marketing to build luxury brands, Kogan Page, London



Kapferer, J-N (2012) The New Strategic Brand Management, 5th edn, KoganPage, London

Knoll, S (2008) Cross-Business Synergies: A typology of cross-business syneand a midrange theory of continuous growth synergy realization, GablerEdition Wissenschaft, Wiesbaden

Moore, CM and Birtwistle, G (2005) The nature of parenting advantage inluxury fashion retailing – the case of Gucci Group NV, International Journaof Retail & Distribution Management, 33 (4), pp 256–70

Rigby, D, D’Arpizio, C and Kamel, M-A (2006) How more can be better,Financial Times, 5 June

Rumelt, R (1991) How much does industry matter?, Strategic Management Journal, 12, pp 167–85



INDEX

Note: Italics indicate a Table or Figure in the text.

Advertising Standards Agency (UK) 71Africa 13Ahrendts, Angela 107Altagamma see Fondazione AltagammaAlterEco 158Amazon.com 32anti-laws of marketing 47–48Apple 16, 49, 100, 108, 173Approche Sur Mesure 119–20Aristotle 69Armani 98, 146, 169Armani, Georgio 188

Arnault, Bernard 7,42, 92, 180‘artification’ 4, 63–84books 82ladder 81market entry through art 74–75relationship between art and luxury 71–72

Aston Martin 48Audi 2, 10, 28, 102, 169, 177Audi City 181–82

Bailey, Lachlan 33Bain & Company 2, 9, 27, 46, 99, 131, 154, 166Bastien, Vincent 2Baudrillard, Jean 15Baümer, Lorenz 74Bell &Ross 60

http://amazon.com/

http://amazon.com/



Belloni, Antonio 187Benjamin, Walter 177Bernstein Research 9, 42BMW 2, 10, 102, 169Bottega Veneta 68, 92

brand stretching 180brands 8–9, 18, 90, 92advertising and 34–35, 48, 53building 32, 167cars 8consumer loyalty and 20content 118counterfeit 14dream value 18, 30followers 32iconic products 56internet and 29locations in Asia 27luxury 8, 20, 24–25, 57–58, 101–03, 153, 180, 189–91, 196‘made in’ 107–09masstige 175, 179, 180, 181Niche 146

positioning 8premium/super-premium 8–9, 49, 104, 105, 109, 143–44, 180Bravo, Rosemary 28Brazil 13, 38BRIC countries 3, 13, 42, 46, 90, 106, 177, 185, 193, 218Bristol Bay Protection Pledge 160Bulgari 3, 45

price/earnings ratio 201–02share price in 2011 205see also LVMH-Bulgari agreement

Bündchen, Gisele 33Burberry 14

delocalizing production 97, 98, 107, 177dependence on Japanese market 28digital strategy 118–19worldwide web 116



business models 165–84comparison 170cost-saving orientation 174–75criteria for luxury 169–82discounts/super-sales 179

fashion 171–72, 179French luxury brands 183German cars 169innovation 178–79Italian luxury brands 168, 183production process 173–74quality orientation 177–78relocalization 176–77size of business 191US luxury brands 182value creation 168value versus volume 171–72

Cartier 75, 80, 82, 124, 141, 158, 173, 192Cartier Foundation for Contemporary Art 80Castarède, J 44celebrities 15, 68, 90

promoting brands 33–34Chanel 2, 3, 16, 20, 33, 34, 45, 47, 56, 57, 68, 102, 107, 108, 153, 166

China 127consumer perception of 169innovation 178internet 126 Japan 76pricing 144sustainable development 35–36

Chanel, Coco 76–78, 79China 3, 9, 13, 27–29, 43, 54, 55, 90, 127advertising 36, 69–70art and 75delocalization 108, 177family-owned brands 193–95jewellery industry 194Louis Vuitton 28



luxury consumers 7, 10, 14, 17, 20, 21–22, 27, 32, 106, 193luxury sales 27, 193–95middle classes 66Nike 153single-child policy 29

sustainable development 38urbanization 90Chinese Authority for Industry and Commerce 36Cicero 69CIVETS countries 42Coach 23–24, 31, 47, 68, 104–05, 169, 175, 177, 179, 182

‘accessible luxury’ 105delocalization of production 98, 176

Coca-Cola 127, 195Combas, Robert 80Comité Colbert 18, 46, 99, 100, 124, 183‘conformists’ 133Corneliani 46, 190counterfeit goods 14, 67, 176–77

consumer view of 139, 140grey market 120–21logos and 92

Crova 191customer relationship management (CRM) 124–25

Dali, Salvador 80delocalization (of production) 97–111, 153

challenges 110consumer opinion 106–07‘made in’ and 109see also relocalization

designers 33, 57cult of 41, 52stratification of 52–54

Dior 45, 81, 127, 138, 146, 159, 166price and 138sustainable development and 159

directly operated stores (DOS) 122



Dom Perignon champagne 125, 179‘dream equation’ 30, 54Duchamp, Marcel 80

eBay 121e-commerce 32

see also internetEstée Lauder 201exclusivity factor 1–2

Facebook 29, 120, 123fair trade 158family-owned luxury companies 203, 206, 209

see also LVMH-Bulgari agreement

fashion 2, 17–20, 68, 119business model 19, 95, 104, 171–72desire and 17, 47‘shelf life’ 175strategy 153

fast-moving consumer goods (FMCG) 134, 175, 195Fauchon 160Ferrari 1, 8, 10, 16, 22, 45, 47, 57, 102, 114, 154, 171, 178Fondazione Altagamma 18, 46, 99–100, 183Forbes 166Ford Motor Company 175Ford, Tom 180Frankfort, Lew 105

Galliano, John 15, 52, 80Gap 33Gates, Bill 168

Gehry, Frank 80Girard, René 17Godin, Seth 131‘green conspicuousness’ 38Grey Goose vodka 49, 132, 178Gucci 3, 17, 20, 33, 45, 47, 92, 127, 180, 210

H & M 33, 173



Kenzo 98Kering 2, 13, 42, 79, 80, 94, 151, 167, 188, 199, 203, 204, 206, 210, 213Kiton 190Klein, Yves 81Koons, Jeff 72

Kyoto Agreement 150Lacoste 46, 100, 158–59, 169Lagerfeld, Karl 33, 52, 82, 188Lauder, Estée 45Lexus 2, 16, 38Lifshitz, Ralph 101‘lipstick effect’ 45logos 46, 91–93Longinotti-Buitoni, Gian-Luigi 8L’Oréal 31–32Loro Piana 3Louis Vuitton 1, 2, 12, 14, 22, 43–44, 45, 47, 58–59, 68, 74, 80, 92, 94, 179

advertising 71after-sales 154brand dimensions 26, 107brand equity 23China and 3, 127, 193consumers’ perceptions of 23, 139–40designers and 52flagship stores 66, 106, 176growth and 26, 93internet and 58 Japan and 75–76levers of dream potential 26local production 103origins 210strategy 93

luxury‘abundant rarity’ strategies 4advertising and 34, 53–54art and 52–54, 59, 63–84as absolute concept 44–45as business model 47–49, 100, 103



attitudes to 69beauty and 152brands and 8, 24–25, 101–03confusion with fashion 19–20, 153consumers’ perceptions 11, 18, 19, 48, 122, 155, 167–68

craftspersons and 140–41, 153cult of 55–57, 114, 181definition 2, 10, 11, 17, 65–66, 88, 130–31, 155–56, 167, 168, 182democratization 54, 66dimensions of 130–31diversification 3dreams and 7, 8, 109, 117–18, 142, 161durability and 154eBay and 121economic recession 87entry lines 144–45experiential 15, 32facets 24future 12–17gifts 102halo effect 146heritage and 142, 182

horizontal expansion 3internet and 29–33, 113–28‘invisible’ 59irrationality of 155licences and 152lifestyle and 131–32‘look of’ 100magic and 57–58, 142market value 9, 10, 46–47, 99, 132, 154, 166meaning 44–49, 99–100new 132niche 190power and 89price and 131–32price/earnings ratios/profitability 199, 200provenance 101–03



timelessness 172see also price of luxury

LVMH (Louis Vuitton Moët Hennessy) 2, 7, 13, 42, 46, 59, 80, 92, 94, 167, 180Hermès and 186–87, 188, 189sustainable development and 151, 157

LVMH-Bulgari agreement 185–208background 186–87benefits 196–97BRIC countries and 218China and 193–95family-owned brands 187–89financial impact 202–03growth assumptions 201–03price of 197–201reasons for 188–89

LVMH House 219Lynch, David 81

Madonna 33magic 57–58Manet, Edouard 81Mango 173marketing 180Marx, Groucho 1Maslow, A 56masstige brands/products 2, 25, 64, 68, 132, 133, 168, 169, 172–74mating society 90Mauboussin 135, 137, 194

price of 137Mauss, Marcel 45McCartney, Stella 33, 50, 158McKinsey 106McLuhan, Marshall 77Mercedes-Benz 2, 48, 57, 169Michael Kors 33, 182Miele 154Mikimoto 192Millerio dits Meller 190MINI 49, 100



MINT countures 3, 13Moët Hennessy 2Moscow 166Moss, Kate 33Murakami, Takashi 52, 80

Nespresso 16, 49, 100Net-a-Porter 135, 144New York 166Nigeria 69Norlha 140

Paris 21, 106Patek Philippe 17, 92Pernod Ricard Group 196Pinault, François 80Pitt, Brad 34Polet, Robert 7–8‘populance paradigm’ 94Porsche 17, 56, 102, 104, 174, 177, 178Porsche, Ferdinand 11PPR see KeringPrada 13, 25, 27, 42, 47, 68, 71, 97, 99, 127, 169, 176, 183, 195, 201Prada, Miuccia 105, 188premium brands 2price/earnings ratios/profitability

luxury companies 199other companies 200

price of luxury 129–48effects of reductions on status 137–39high prices 141–42how consumers evaluate 143how expensive is expensive 132–35management of 144–45minimum 136psychology of 133–34, 136restaurants 133survey of consumers 134–44



Ralph Lauren 25, 48, 60, 64, 90, 92, 98, 100, 130, 135, 169, 179, 180Black Label 148, 172‘luxury for all’ 182Purple Label 148, 172stores 181

Ray, Man 80reference price 133–34, 143relocalization of production 176–77, 183

see also delocalizationrestaurants 133‘retailtainment’ 43, 190Richemont 13, 167, 213Ritz-Carlton 45Rolex 47, 92, 127, 169Rolls Royce 2, 10, 64, 150, 171, 177Royal Salute 8, 51, 100

Saint Laurent, Yves 80, 81Samsung 16, 108, 173Sara Lee 175Schiaparelli, Elsa 79–80Schneider Electric 27Scorsese, Martin 81selective distribution 25, 50, 122Seneca 69‘snobs’ 133Sprouse, Stephen 52, 72Starbucks 64Starwood 167status 92storytelling 91sustainable development (SD) 35–38, 149–62business imperative 157

buyers’ sensitivity to 37definition 150luxury strategy 160–61quality standards 157–60

Tesla 16, 151



T omas, Dana 98Thomas, Patrick 18, 59, 65, 108–09Tiffany 136, 157, 192

sustainable development 159–60Trapani, Francesco 186, 189, 192, 196

‘überluxury’ 66Uniqlo 12, 34

Van Gogh, Vincent 72Vente-Privée.com 144Versace 33Versace, Donatella 188Victoria’s Secret 132, 133, 169, 182

virtual rarity 51–52Warhol, Andy 72Wilde, Oscar 73wines 131, 177

Xiaoping, Deng 90, 156

Yamamoto, Yoji 80

Yi, Ding 75Zara 21, 34, 173, 174

business model 172, 181Zegna 20, 27, 46, 71, 176, 190, 191, 195



Publisher’s noteEvery possible effort has been made to ensure that the informationcontained in this book is accurate at the time of going to press, and thepublishers and authors cannot accept responsibility for any errors oromissions, however caused. No responsibility for loss or damageoccasioned to any person acting, or refraining from action, as a result ofthe material in this publication can be accepted by the editor, the publisheror any of the authors.

First published in Great Britain and the United States in 2015 by Kogan PageLimited

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© Jean-Noël Kapferer, 2015

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ISBN 978 0 7494 7436 2E-ISBN 978 0 7494 7437 9

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