American Marketer


Luxury industry caught between growing momentum and lasting change

December 28, 2010

Affluent consumers are being repositioned this year


A new study claims that the Great Recession was the tipping point for several lasting changes in consumer behavior and the competitive landscape that threaten to erode the mystique of luxury.

The well-argued position paper from the Boston Consulting Group sounded a warning that the signs of an economic revival should not be construed as a return to business as usual for luxury brands.

“In this new world of luxury, being iconic and exclusive is not enough to make a brand grow, and fewer consumers are willing to blithely accept high prices as the mark of luxury,” said BCG consultants Jean-Marc Bellaiche, Antonella Mei-Pochtler and Dorit Hanisch in their study. “They need better reasons to buy.”

Brand new issues

Four trends have devalued the concept of luxury over the past few years: changes in tastes and buying behavior, rise of new markets, blurred definition of true luxury and the arrival of new media.

“Long after the recession has faded, these trends will continue to exert pressure on the industry,” the study said.

At the core of this flux is what passes for luxury.

The three prongs of luxury – rarity, quality and refinement – simply are not limited to old mainstays such as watches, jewelry, fashion, apparel or experiences.

Consumers now append these luxury attributes to alcohol, food, travel, hotels, spas, cars and technology such as smartphones.

Not surprisingly, such inclusivity enlarges the global market for luxury to $1.3 trillion, up from the typical $200 billion to $235 billion in sales generated annually from the traditional categories.

While this big-tent approach means higher profits, it does question the notion of maintaining mystique with luxury goods and services.

A booming 1990s gave rise to conspicuous consumption, where brand image trumped quality.

Midway through the decade, access to information enabled comparison of luxury products. Consumers became more discerning as they tried to avoid the stigma of conspicuous consumption.

The recent economic meltdown drove consumers away from symbols toward the actual worth of products. Weakened finances and reluctance to spend while others were facing hardship underpinned this behavior.

In other words, substance over style is the new consumer mantra for luxury purchases.

Bounders, boundaries, bounding

The rise of buying power in China, Russia and India, however, will reshape luxury even as a two-speed world becomes reality: mature markets such as Western Europe, Japan and the United States lagging rapidly developing economies in Asia, Eastern Europe and Brazil in Latin America.

While China is expected to become the world’s largest luxury market in the next five to seven years, luxury brands cannot take their name recognition for granted, as BCG has found in its study of that market. Indeed, many Chinese consumers could not name or misidentified top luxury brands.

Of further concern to luxury brands is the blurred boundary between luxury and ordinary.

Prior to the recession, mass-market competitors copied luxury tactics such as celebrity endorsements, trendy logos and relationships with designers to trade-up their product offerings.

When the recession hit, panicked luxury retailers went the other way and slashed prices. Not surprisingly, consumers got even more confused about the delineation between luxury and ordinary.

While the discounts will fade over time, the damage to luxury arguably is lasting.

Finally, the advent of new media has upended the top-down communications and marketing strategy of most luxury brands.

Blogging, tweeting through Twitter and social networking via Facebook, virtual dressing rooms and online advertising have made marketing and communication between luxury brand and consumer more democratic.

“Some of the savviest brands are embracing technology and online media to break typical selling cycles and reach consumers several months before products would otherwise have become available,” the BCG study said.

Most of these challenges identified by BCG can be overcome if luxury brands better understand consumers and how their spending behavior and tastes have evolved.

Five household segments

BCG partnered with European market researcher Concept M to analyze and segment buying behavior in six mature and developing markets – Brazil, China, Europe, Japan, Russia and the United States – that account for 150 million luxury-consuming households.

These households, which comprise 90 percent of worldwide luxury spending, were segmented by wealth and extent of luxury purchases annually.

Aspiring mass-market households account for four out of five luxury-consuming households in these six markets that BCG tracked. While not big spenders, this group accounts for nearly 30 percent, or $60 billion to $65 billion, of traditional global luxury sales.

Next up is the rising middle-class-household segment that accounts for approximately one-fourth of global luxury sales, or $46 billion to $52 billion.

New-money households spent the most on luxury goods, per BCG – accounting for $72 billion to $79 billion, or more than one-third of traditional luxury sales.

Old-money households are equally high net worth, albeit they inherited their wealth unlike the new-money segment, which generated their own fortunes. This segment accounted for 7 percent, or $13 billion, of traditional luxury sales.

Finally, there are beyond-money households – similar to old money, but with complete indifference to status. This group avoids conspicuous displays of wealth and accounts for 5 percent of traditional luxury sales.

Interestingly, the three least-established segments – aspirational mass-market, rising middle class and new money – spend the most on luxury, according to BCG.

“It is important for companies to recognize that the full return of demand – whenever it comes – will not mark the end of the luxury industry’s challenges,” the BCG study said.

“A set of fundamental and lasting changes is redefining what it takes to thrive in the new world of luxury,” the study said. “The changes will affect all major aspects of business: markets and consumers, products and services, marketing and distribution, and the corporate culture.”

TOMORROW: How can luxury brands survive lasting changes in consumer behavior?