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Consumer goods and retail August 7, 2020

Innovation pathways for luxury brands – evolution or reinvention?

Luxury retail store
Since its inception, the luxury industry has been a growth story.

Product extensions, store network expansion, entering growth markets – especially China and digital commerce – have been the drivers of the last years. Business cycles? There were some downturns during the SARS epidemic and the financial market crisis in 2009. Soon after, growth resumed at an even accelerated rate, driven by many more consumers craving luxury goods. Few thought that the diversification in terms of products, geographies, sectors, and consumers could be affected by economic downturns. All that is needed is a constant growth of the luxury clientele and their disposable incomes for marketers to turn them into customers of the brand.

The illusion of control

The belief that consumers can be “created” systematically and through planned management decisions has been the guiding narrative for luxury brand managers over the last decades (Som 2020). Flawless execution and managerial excellence were what mattered. However, in an environment where things are out of control and substantially affecting the business model, the perfection of codified standards might reach its limits. COVID-19 has challenged these assumptions. Is this going to change the luxury industry as we know it? It has at least challenged our illusion of control. No one was prepared for the outbreak of a global and devastating pandemic. Before the crisis, luxury stocks were trading near all-time highs of about 26 times forward price-to-earnings. Stock prices of the large luxury firms have plummeted, depending on the sector, by 30% or more from the beginning of the year to the outset of the pandemic. Stores had to be closed, supply chains were severely affected, travel was restricted, and consumers shifted demand to necessities. While the effect over one fiscal quarter is temporary, the longer-term implications are still unclear, and the strategic response to the crisis will not be easy. Due to the closure of stores in most markets, store-based retail has been majorly affected. However, e-commerce has also suffered a decline in traffic and transactions as consumers hold back with purchases in the face of uncertainty and by the disruptions in the global supply chain. For example, the YNAP-group, one of the world’s largest e-commerce platforms, has decided to close down its logistics center in Italy to ensure the safety of all employees.

Many are questioning what these developments will mean for the way our economic system operates and how consumer needs and values will change. When societal values are changing, so must social conceptions of what social actors perceive as a necessity and a luxury.

Crises are nothing new for the luxury industry, nor will this be the last crisis luxury brands will face. Luxury is a global business. With globalization comes the managerial need to master the complexity of orchestrating personalized solutions to diverse customer needs and creating a delivery system. Luxury brands need to ask themselves how they can build resilience and turn the threat into an innovative force. How should luxury brand managers act now? By asking themselves how to unleash this force and lead their business into the future.

Building resilience: The innovation imperative

Innovation is nothing new for luxury brands. One can even argue that luxury brands have started primarily as social innovation. For much of human history, status was ascribed through birth. The emerging consumer society challenged existing social orders for which luxury goods were a status marker unobtainable to everyone who did not belong to the club – a crisis for the aristocracy. Now, these status markers could be bought in the marketplace and were accessible to anyone with the means to afford it, creating social status and an expression of identity (Kapferer & Bastien, 2009). With the emergence of luxury brands and their designs, the codes to construct social affiliation and distinction multiplied the myriad opportunities to create one’s social identity. This social innovation is also clearly visible in exclusive service offerings, from private member clubs to jets and upscale hotels. Exclusivity, as a value proposition, emerged out of a crisis of world order with predetermined faith.

Yet, these brands have not always been luxury brands. They started with an innovation catering to the needs of discerning customers who were willing to pay a premium for it. They have also challenged business models of incumbent players by providing functional innovations that offer a tangible benefit to consumers. One such example was the story of a young businessman whose initials are now known worldwide. Before the 1860s, one of the significant challenges for travelers was how to transport their clothes efficiently. The round boxes that were the standard at that time were not easily stackable on a horse carriage, and, due to the circular form, wasted valuable space that could have been filled with other goods. Even worse, they were not waterproof, so rain could quickly get in and wet the clothes. A young man called Louis Vuitton realized this need and developed rectangular trunks with a rainproof canvas. These trunks are still a core of the company’s heritage today, although the brand has since expanded its portfolio to a wide range of products for discerning global travelers.

While luxury brands have been such a source of desire over the last decades, how to create desire changes with rising consumer expectations in the digital age. Luxury is about excellence and perfection.

Luxury brands also are a successful economic innovation. The luxury industry emerged in the 1980s, and new forms of managing creative industries came to life with the holding model, in which desirable brands were combined to create synergies and increase their market power, such as harnessing shared resources, such as in buying media space, securing desired retail store locations in the high streets and shopping malls through their negotiation power or building up and nurturing creative talent (Som & Blanckaert, 2015). Struggling family-owned companies with a strong heritage were struggling to manage the generational transition. It provided an excellent space for active investors to infuse them with managerial expertise. Summarizing, the evolution of the luxury industry has been a history of innovations that emerged out of challenges and crises triggering changes in consumer needs and purchasing behavior. It has been around for thousands of years, and we speculate that it will be for thousands of years to come. The fundamental psychological, social, and cultural drivers of luxury consumption will survive almost any crisis. These ingredients create the desire that makes luxury extraordinary: on a psychological level, feeling unique and special; on a social level, the creation of status; on a cultural level, endowing the creation of a magical and sacred aura (Gurzki, 2020). However, the form of luxury and its creation might change. The challenge for luxury brands is balancing and nurturing the heritage and preserving traditions while also being relevant today and imagining the future to elevate the brand into timelessness.

Shifting in the luxury playing field

What’s next? Will the growth story of the past continue? This crisis might particularly highlight the agency of the consumer and the role of technology. And more shifts might be coming for luxury brand managers to consider:

Social innovations: From brand-centric to customer-centric

Luxury at heart is something extraordinary that creates desire. While luxury brands have been such a source of desire over the last decades, how to create desire changes with rising consumer expectations in the digital age. Luxury is about excellence and perfection. Also, the longevity of luxury is a strong proposition in an ever-changing world. New market entrants often use agility and iterative methods to design their customer-centric experiences. They have built excellence in managing the customer discovery process and scaling quickly. One example would be online shops such as Farfetch or YNAP that have set a standard for luxury online shopping and have quickly managed to establish a global presence. Moreover, with the rise of technology, these players have the potential to create new in-store experiences, for example, through the use of augmented reality, that address the needs of digitally savvy shoppers, such as in Farfetch’s store of the future concept.

Shifting to such a mindset might be the most challenging and most risky part. Yet, to remain relevant, brands need to move away from a static approach to dynamic interaction with consumers. They must reengage in relationships with consumers by assessing changing consumer values and inferring the expectations of target consumers. For example, digital touchpoints and social media listening can be excellent sources for learning consumer needs, wants, and desires. The challenge is to get a holistic view of the consumer and seamlessly integrate these insights across the entire journey.

While digitalization and data analytics offer possibilities to personalize the consumer experience, companies must go beyond personalization to truly co-create experiences with consumers. Seduction does not work by personalized communication alone. It works if this communication triggers in consumers’ minds the desire to dream and be seduced.

Listening to and co-creating with consumers might lead to radical new insights and a redefinition of what brands imagine as luxury. With changing social values, how consumers perceive luxury is likely to evolve further. The luxury of the future can only be a luxury if it remains extraordinary, desirable, and relevant in the world of tomorrow’s consumers.

Functional innovations: From omnichannel to orchestrating experiences in a luxury ecosystem

Thinking in ecosystems necessitates a shift from perceiving marketing and selling as two different disciplines to integrating them into one comprehensive experience. While providing truly omnichannel experiences is still and will remain a challenge, the future may evolve to be about personalized and technologically augmented experiences. It could not only be shared seamlessly across the company’s channels but across an entire ecosystem of partners. To stay on top of the game, luxury brands may think of not only adopting technological innovations but setting the standard for desirable experiences. For example, players such as Tesla have shaken up the luxury segment in the automotive industry by adopting software and tech-driven approaches to designing cars. Digital players such as Apple have redefined the concept of the watch, and Apple has undeniably created its own space as part of the premium end of the sports watch segment. New players such as those in the spaces of smart clothing, peer-to-peer-based travel, subscription-based business models, and sustainability-based models are just around the corner to shake up incumbent business ideas by offering enticing alternative experiences. With an explosion of touchpoints and corresponding consumer journeys, orchestration of these experiences becomes more crucial than before. Under this circumstance, it will be essential to find the right response, whether in developing offerings or thinking about the best partnering approach. On the consumer side, mix & match is a clear trend (BCG 2020). And brands thinking beyond their immediate sphere of value creation can leverage it to create buzz and business out of it. Examples would be the collaborations between players from street style and luxuries such as Louis Vuitton and Supreme or even across sectors such as Rimowa and Off-White. Yet the ecosystem does not stop with products. It includes partners across all activities included in the value co-creation, from channel partners to producers of raw materials to consumers to the society.

Economic innovations: From linear to circular business logic

With the rise of customer-centric luxury ecosystems, the linear business logic of brands needs a rethink. Re-invention is around the corner. Only thinking from the factory to the point of sale may no longer be sufficient, if it ever has been. For example, with the rise of second-hand or the use of recycled waste as materials, luxury consumers and innovative startups showed how new trends could extend the scope of customer interactions. Established brands are now embracing these ideas. However, circularity goes far beyond sustainability and is a radical shift in business logic. For luxury brands, this requires an even more vigorous pursuit of orchestrating the entire value chain. It necessitates thinking about new business models. Brands – including those producing products and experiences that are meant to be timeless – need to think not only about second-hand markets. This will necessitate how to predict demand better, avoid overproduction, and bring them to the market smartly, avoiding reputational damages. While part of the overstock now might be shifted to other markets where there is demand, the industry faces the dilemma of recapturing cash flows by selling it without engaging in risky promotions that could harm the brand long-term due to their cultural specificity of being made-in a particular country. This also requires brands to think about how they can strengthen their global resilience (cf. McKinsey 2020A).

Many studies show that the origin of luxury, the made-in, matters for luxury. Made-how, -why, and -by will matter even more. Pursuing global resilience will witness changing the rules of the game – not being sustainable may come at a cost that luxury brands can no longer afford. Brand heritage alone may be insufficient to lure consumers that demand radical transparency. Slow-fashion designers or local-focused restaurants, such as designer Stella McCartney or chef René Redzepi’s Noma, have shown how the concept of circularity can help brands to reshape their value proposition – for example, with locally sourced renewable ingredients. This change in focus has implications across the entire ecosystem, especially now for global supply and distribution chains. The benefit of local sourcing and circular thinking becomes particularly apparent in the current crisis with a disruption of global supply chains. For example, most Italian family-owned SMEs that make up 30 to 40 percent of Italy’s supply chain have to fight the economic consequences of the crisis and are struggling to survive. Yet, they are crucial in refining the materials through skilled craftsmanship. Without them, luxury will lose a core part of its value proposition. In economic terms, circularity also means thinking about how to restart the circular logic partnering approaches, including payment conditions and credit lines needed to sustain production. The role of the brand thereby shifts – in orchestral terms – from that of a soloist to that of a conductor.

Leading the way forward

In the current health crisis scenario, luxury brands have reacted to the business challenges like any other industry. Market analysts expect a dip in sales between 10% to up to 40% for 2020, depending on how fast the recovery will take place and how effective luxury brands will be in restarting business globally (Bain & Company 2020, Biondi 2020, McKinsey 2020B).

Luxury brands can use the time in this severe and shocking crisis to take a step back and reflect on their future strategy and their role to shape a positive impact on society.

How can luxury brands steer the way? Innovation imperatives – social, functional, economic – are the key to steer the way to profitable growth. This shift requires not only management but real leadership within an agile organization that is willing to navigate the oncoming waves. Many brands have shown their commitment to society, taking over responsibility as social, environmental, or even political actors. Such examples include LVMH’s announcement to produce disinfection for free for healthcare professionals in the COVID-19 pandemic or LVMH’s and Kering’s initiative to finance the rebuilding of Notre Dame. Luxury brands, as societal actors, do good in leading the way and demonstrating responsibility, leadership, and agility. This mindset, combining both opportunity-seeking and attention to deeply rooted values, could provide a fertile ground for organizations to flourish.

While we already see first post-crisis signs of people returning to stores and splurging on luxury purchases to engage in revenge buying, the market is still far from recovery. For example, Hermès reported single-day sales of $2.7 million at their Guangzhou flagship store after the lockdown was over. According to media reports, this was the highest number that was said to be ever reported in ChinaNevertheless, it will take time for business to resume. As global travel is restricted, consumers are likely to shop locally more often, rather than while traveling abroad, which has been a recurring pattern in the past. Because other experiential sectors such as hotels and tourism are likely to suffer for a longer time, consumers might seek out special shopping experiences in branded retail stores. Managing the relationship well will thus be crucial for brands to build trust with consumers locally and to offer them extraordinary shopping experiences.

Only time will tell how soon will luxury resume its growth story. Luxury brands can use the time in this severe and shocking crisis to take a step back and reflect on their future strategy and their role to shape a positive impact on society. For example, the future of fashion shows certainly needs both evolution and re-invention, as reported in the press. The COVID-19 crisis can be used as a catalyst for change and provides the energy to drive forward the innovation imperatives. And luxury brands have been at the forefront in this, emerging out of the uncertain situation stronger than before. As has been shown repeatedly throughout history, consumer desire for the extraordinary will create the way to the next frontiers of the business of luxury.

 

This article was originally published by The European Business Review on July 27, 2020 and republished with permssion. 

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