Reputation risks arise for luxury brands in emerging markets: report

Luxury brands struggle to maintain reputation when branching out to new markets, according to a new study by ACE European Group.

Emerging consumer markets are a key target for luxury brands, but brands have to consider the risks before diving too deeply into a market. Since a brand’s reputation is vital to its survival and the hardest risk to manage, it must be cautious when expanding to new locations.

"Luxury brands are always in danger of damaging their reputations," said Al Ries, founder and chairman of Ries & Ries, a Roswell, GA-based marketing strategy consultancy.

"Consumers are much more likely to complain about problems with high-priced products than they are about problems with low-priced goods," he said.

"No brand is ever safe. If a problem develops, the best strategy is to deal with the problem as rapidly as possible.

"And the best person to speak for the brand is the CEO of the company involved. Almost every problem can be handled if it is dealt with immediately."

Mr. Ries is not affiliated with ACE Group but agreed to comment as an industry expert.

ACE Group was unable to comment by press deadline.

The survey was conducted by ACE European Group and sampled 45 respondents with responsibility for risk management at companies across the luxury goods sector, with annual revenues ranging from $250 million to well over $1 billion in Europe.

Emerging risk markets
ACE Group surveyed a sample of 45 European luxury goods firms and conducted in-depth interviews to reach conclusions about risks in the industry.

Environmental, business travel and directors and officers liability are the three most important emerging risks for the industry to watch.

Seventy-five percent of senior risk executives surveyed stated that reputation is their company’s greatest quality and 80 percent agreed that reputation risk is the most difficult risk to manage.

Countries represented in ACE Group's report

In emerging markets, greater risks rise because of the environment, travel and directors and officers liability. These three factors will create the greatest future expenses for luxury brands.

Also, these risks can be compounded by internal company challenges such as lack of management and budget.

The environmental history of a brand’s new location is typically unknown. Consumers and investors are more interested in the environmental practices of a company pertaining to air pollution, destruction of habitats and water scarcity, all of which can negatively impact the perception of the brand.

Nine out of 10 surveyed claimed that despite new technology that permits video conferences and international phone calls, the amount of business travel is still very high. The risks that develop from traveling can be theft, travel disruptions, lack of medical facilities and other, sometimes unpredictable, inconveniences.

However, to successfully expand a business overseas, it is necessary to send executives to new locations.

ACE Group report

With the expansions, directors reported that they feel increasingly exposed and question the brand's insurance policy. About two-thirds of the companies in the survey do not have a specific directors and officers policy.

However, with the unpredictable travel options, the lack of insurance only creates more risk and concern for the brand.

The risk that a brand accrues in the process of expanding generates more hazards within the company. The reputation of the brand remains the highest concern for most brands, but this reputation cannot be upheld if the company is unable to accommodate its new markets.

Risky business
A brand’s reputation can be at risk at any time, not just in emerging markets.

For example, in collaborations it can sometimes be risky for luxury brands, and half of affluent shoppers say that the biggest risk for a luxury partnership is the potential damage to the brand’s image or reputation, according to the latest survey from the Luxury Institute.

Overall the study found that most affluent shoppers enjoy brand partnerships, even with the risk. However, luxury marketers should pair up with brands that have the same goals and mindset when seeking partnerships (see story).

Also, many luxury brands have branched out into new product categories, but the products must be well designed and well made to convince consumers that the purchase is worthwhile, experts say.

Now, fashion brands are getting into home products while automakers are creating apparel and handbags. Brands should beware when launching new product categories and make sure to create a reputable product or risk diminishing their reputation (see story).

The label of the brand often depends upon the perception of the consumers. The risk that emerging markets, collaborations and new launches present a brand with is often heavily weighed against the potential benefits the endeavor might produce.

"In today's environment, every brand, including luxury goods manufacturers, face risks that could damage their reputations," Mr. Ries said. "That's just part of the price of doing business.

"There's no reason for a company to avoid emerging markets," he said. "They are the best prospects for luxury goods. Look at the Chinese market which has exploded in the past few years."

Final Take

Nancy Buckley, editorial assistant on Luxury Daily, New York