Luxury Goods Market: Crisis? What Crisis?

In the luxury goods market, nothing quite drives sales as brand recognition does. Slap a Louis Vuitton on a handbag, and shoppers will think nothing of plopping down a thousand euros or more to carry it off.

As Europe sank into its post Panic of 2008 phase of doom and gloom, the luxury goods market did not just take the downturn in stride, the sector positively bloomed and prospered. At this rarefied end of the market, there is simply no such thing as a recession.

While traditional manufacturers of mass market consumer goods struggled to survive, the likes of Hermès, Salvatore Ferragamo, Ferrari, and a host of other premier brands made a killing. The merged French luxury goods provider of Louis Vuitton and Moët Hennessy (LVMH) saw its combined sales jump from EUR17.2bn in 2008 to over EUR30bn last year.

LVMH’s performance is by no means exceptional. Each year an estimated ten million consumers make their first forays into the high-end luxury goods market, now estimated to include no less than 330 million people worldwide – triple the number of discerning buyers counted merely twenty years ago.

“While the luxury goods sector gains new clients in new markets, it also loses quite a few customers in more mature markets such as those in Europe, North America and Japan.”

The luxury goods market currently moves around EUR220bn annually with growth coming mainly from China which is set to shortly replace Japan as the most important market for luxury products and services. However, luxury goods makers are fast discovering that China is not quite as easy a market as it is often mistaken for. A recent in-depth analysis by global management consulting firm Bain, concludes that Chinese customers are exceptionally fickle in their buying habits, displaying nothing like the brand loyalty that is taken for granted elsewhere.

Savvy Buyers

Bain researchers found that Chinese consumers are surprisingly savvy. “We discovered a lot of indiscriminate binge buying of status symbols in megacities like Beijing and Shanghai. However, the fad soon passes and consumers become highly conscious of both price and quality,” says Claudia D’Aprizio who drafted the Bain report.

While the luxury goods sector gains new clients in new markets, it also loses quite a few customers in more mature markets such as those in Europe, North America and Japan. It is not just the economic crisis that caused dampened sales; a sort of disenchantment seems to have set in.

A combination of factors is driving this downward trend: Consumers in traditional markets have become more socially aware than they used to be, shunning brands that are perceived as portraying a lifestyle out of tune with both contemporary values and reality. Steady price hikes, above and beyond inflation levels, have also caused disillusion. Most luxury goods brands have upped prices by as much as 70% over the past two to three years in an attempt to bridge the price gap between China and the rest of the world.

As the Chinese increasingly travel overseas, they couldn’t help but notice the comparatively low prices that luxury goods command outside their country. Instead of driving prices down in China, most manufacturers opted to increase price levels everywhere else, instilling a sense of betrayal in their more traditional customers.

Troublesome Hedonists

Another problem faced by the purveyors of luxury goods is that the market has shifted in a somewhat curious, and rather unexpected, direction. According to the Bain market study, the biggest group of luxury goods consumers are the hedonists – people who like to flash their mostly newfound wealth.

As it happens, these in-your-face consumers are highly unlikely to recommend luxury brands to their friends. In fact, 47% of consumers deemed hedonist by market researchers said they would most definitely not recommend any of the products they buy to friends or family.

However, Bain does propose a solution that may yet stem the trickle exodus of western consumers: Go the Apple route. “Brands should be much more active in creating an experience rather than merely a product, and may also strive for a much improved after-sales service. Opening other sales channels besides high-end shops and branded stores is another of the suggestions made.

However, the advice, though sensible, goes against the grain of one of the peculiarities that mark the luxury goods segment. To a fault, successful companies at this end of the market have managed to overcome the difficulties of perceived value – how much can a handbag, or a scarf, really be worth? – by implying that whomever uses their exclusive products becomes, in turn, more desirable and admirable as a human being.

This is the stuff money can’t buy and only expert and sustained marketing efforts can deliver. A Jaeger-LeCoultre watch still only tells its wearer the time, give or take a few seconds, but may cost the equivalent to the annual remuneration of a Swiss civil servant on a moderately respectable pay grade. Such a timepiece, however masterfully crafted, is not really good value for money. Still, the company is doing just fine and has no trouble selling its exquisite merchandise.

Curious Market Forces

Economists dub these high-end products Veblen goods, named after the American economist Thorstein Veblen (1857-1929) who conducted extensive research on conspicuous consumption and is perhaps best known for his book The Theory of the Leisure Class (Oxford World Classics, ISBN 978-0-1995-5258-0). Mr Veblen found that some products generate a demand proportional to their price in an apparent contradiction to the Law of Demand. Thus, the more expensive a given product is, the more demand it generates.

The Veblen effect is well-known to the luxury goods industry. It is but one of a family of much-studied micro-economic effects that propel the sector to ever greater heights such as the snob-effect, the bandwagon-effect, and – most importantly – the common law of business balance, otherwise known as: You get what you pay for – the more you pay, the more you get.

Notwithstanding Bain’s expert counselling, a slick website, fancy app or excellence in after-sales service cannot make up for, or even add to, the human vanity factor that lays at the foundation of a still flourishing industry. In fact, there is little to worry about, for vanity is not a trait likely to disappear anytime soon.