luxury market.pdf

Luxury Brand Routes to Market: Exclusivity vs Expansion

April 2011

© Euromonitor International

2

Luxury Goods – Brand Routes

Introduction

Luxury Market Overview

Routes to Market: Wholesale

Routes to Market: Retail

Routes to Market: Online

Case Study: Polo Ralph Lauren Corp

Conclusion

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3


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Scope

Introduction

Luxury Goods

Designer Clothing

and Footwear

Luxury Tobacco

Luxury Accessories

Luxury Jewellery

and Timepieces

Fine Wines/

Champagne and Spirits

Super Premium Beauty

and Personal

Care

Luxury Travel Goods

Luxury Fine

China and

Crystal Ware

Luxury Writing

Instruments and

Stationery

Luxury Electronic Gadgets





4


• The core objective of this report is to examine how the luxury goods industry is responding to the challenge of

widening its distribution within a changing global market at the same time as retaining exclusivity and rarity, key

luxury attributes which allow brands to charge premium prices.

• The report will look at distribution channels within the global luxury goods market, determining how the latest industry

trends and developments are impacting company strategies, and discussing how luxury brands are looking to

maintain their premium positioning as well as expand their sales to a wider audience.

• The report begins with an overview of the global luxury goods market’s current status and growth expectations to

2015, as well as an overview of retail channels used by the various categories.

• The report is then split into three key sections focusing on wholesale distribution, retail distribution and online sales

formats, offering an overview of each channel, assessment of its strengths and weaknesses, company strategies

and case studies.

• A case study looks at the Polo Ralph Lauren company in more depth, investigating its ability to position itself as both

a premium luxury brand and a more mid-market label at a time when it is attempting to move to a more premium

position in emerging Asian markets, and assessing the future prospects of this strategy.

• The report concludes with a series of forward-looking final conclusions, looking at future prospects for distribution

channels, and highlighting key strategies going forward.

• The report does not claim to be comprehensive but rather seeks to offer high-level insight into key developments and

opportunities in the luxury goods market at a time of continued macroeconomic uncertainty.

• Data from several Euromonitor International projects have been used in this report:

• Luxury Goods

• Countries and Consumers

• Travel and Tourism

• Retailing

Objectives of the global briefing

Introduction




5


Global luxury goods: Market

environment 2010-2015

Global luxury goods sales have already begun to recover from the impact of the

economic downturn, but its effects are still evident. Focus has shifted to the

more resilient emerging markets, particularly in Asia, bringing a younger

consumer base into greater prominence. Meanwhile, aspirational luxury is out,

while high-end classics, which continue to maintain their worth, are popular.

Wholesaling falls out of

favour; but for how long?

Bankruptcies, deep discounting and interrupted order cycles all damaged trust

between brands and their wholesale customers, leading many brands to refocus

on retail activities and place less reliance on wholesale distribution. However, as

growth picks up, and internationalisation again becomes a key focus,

wholesaling will play a vital part in a brand’s ability to reach consumers.

Brands move to take greater

control of retail distribution

As brands such as Hermès and Louis Vuitton safely negotiated the downturn,

their strategies of tight distribution control began to be taken up and adapted by

more brands. The trend for buying back licences in both developed and

emerging markets is still ongoing.

Internet retailing: Luxury

brands begin to believe

It required Net-A-Porter to show the way, but luxury brands, particularly within

the clothing and accessories categories, are finally looking at online potential.

Flagships vs outlets:

Contradictory formats

Are investments in brand image, such as flagships, being neutralised by outlet

store activities? This question is not going to go away.

Distribution strategies:

Developed markets

Premium store environments are still key to luxury positioning but, increasingly,

transactional websites are being used to provide greater accessibility.

Distribution strategies:

Emerging markets

As demand expands, accessibility is key, but not at the expense of brand image.

In-store and online, support for luxury positioning is a key focus.

Impact of counterfeiting

fears on distribution

strategies

Restricting sales via third parties and taking back licences are partly about

restricting production of counterfeit goods and changing consumer expectations

of the type of outlets where they can buy luxury brands.

Key findings

Introduction




6


Introduction






Conclusion




7

Luxury Goods – Brand Routes Luxury Market Overview

2008 recession launches long-term global shift in luxury sales

Luxury Goods: Growth 2005-2007 Luxury Goods: Growth 2008-2010

• Between 2005-2007 sales of luxury goods were

booming in developed markets as well as

emerging economies. The Russian and Indian

markets showed dramatic expansion, of 65% and

107%, respectively, although India is expanding

from a very low base.

• Distribution channels were of course key to luxury

brands being able to meet this burgeoning

demand, across a variety of positionings. Outlet

stores, licensing, joint ventures and wholesaling

all helped brands to expand their footprint rapidly,

alongside retail network growth.

• As the global economic downturn began making an impact

from 2008, the luxury goods market cooled rapidly. This

was particularly true in Russia, where growth fell to just 5%

over the period, as lower-end consumers began to do

without their status pieces and even the most affluent felt

the pinch.

• China’s progress proved unstoppable however, and as a

result, brand attention is being focused ever-more closely

there, and on other Asian markets.

• Worst hit were aspirational buyers, and as brands began to

focus on the more resilient, premium end of the market,

having control over a luxury retail environment saw brands

building up their retail activities.

Growth Key:

<0%

0-10%

10.5-42%

>64%

Luxury Goods: Sales Growth 2005-2007 Luxury Goods: Sales Growth 2008-2010




8

Luxury Goods – Brand Routes Luxury Market Overview

2011: Has the luxury market recovered?

• The luxury market of 2011 still bears the marks of the recent global recession. Two years of declining growth in 2008

and 2009 forced manufacturers and shoppers alike to reconsider their established habits, with luxury brand

distribution left struggling to find a happy balance between the two.

• 2010 brought better news, with a 4% rebound across the 26 markets that account for 80% of global sales, albeit

against a changed market landscape:

• “Bling” and aspirational luxury is out, but value, it seems, is only rarely defined by price; brand equity is paramount;

• China, India and other emerging markets are firmly established as the focus for growth, while Germany looks set to

join Japan in a long-term decline;

• The consumer base is becoming younger, driven by a new generation of white-collar workers in emerging markets;

• New technologies are changing how consumers approach luxury brands; the influence of the internet and social

networking is unavoidable and brands are looking to widen their presence online;

• Manufacturer/retailer relationships have lost an element of trust, with more brands migrating to owned stores.

• By 2015, the market is expected to have returned to steady growth, with emerging markets accounting for one fifth of

global sales. The challenge for luxury brands and retailers alike is to expand distribution to reach these new

consumers, using new technologies, without losing the aura of exclusivity that “luxury” depends upon.

-10

-5

0

5

10

15

0

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% y

-o-y

gro

wth

US

$ b

illio

n

Global Luxury Markets: Developed vs Emerging 2005-2015

Value sales: Developed markets Value sales: Emerging marketsGrowth: Developed markets Growth: Emerging markets




9


• India is forecast to be the standout market in terms of growth to 2015 The country’s luxury goods market is set to

more than double in size over 2010-2015 to generate sales of US$4.3 billion in 2015. This is already attracting luxury

brands to the market and premium retail locations are expected to multiply accordingly, but the potential consumer

base remains comparatively small. Even the richest 10% of households is expected to enjoy an average income of

only US$26,000 by 2015, compared to US$54,000 in China and US$117,000 in Brazil.

• By 2015, China will be the fourth largest luxury goods market in the world, having overtaken France, the UK and

Italy. Even by emerging market standards, the forecast CAGR of 10% is very healthy: not only does China benefit

from an emerging middle class with a rapidly growing earning capacity, but also from a fast-developing luxury

distribution network with which to fulfil customer demand.

• Nevertheless, while China’s sales are expected to grow by US$6.8 billion to 2015, the massive US market is set to

add US$8.1 billion of luxury goods sales. For luxury brands that can rise above the pack in this crowded market,

there are still good returns to be made, although US growth will be modest even by developed market standards.

Where will the luxury goods market be growing most?


-5

0

5

10

15

20

25

-5

0

5

10

15

20

25

30

35

40

% C

AG

R

US

$ b

illio

n

Top 26 Luxury Markets: Sales 2010 vs Growth 2010-2015 Developed markets:2010 sales

Developed markets:Sales added by 2015

Emerging markets:2010 sales

Emerging markets:Sales added by 2015

Developed markets:Growth 2010/15

Emerging markets:Growth 2010/15

80

75

70




10


What will see the most luxury value growth?


• Between 2010 and 2015 there are expected to be marked differences in the product selections of luxury consumers

in emerging and developed markets.

• In emerging markets, an element of “bling” is still present, with relatively ostentatious products such as luxury

jewellery and timepieces and luxury electronic gadgets doing well. As the number of young workers moving out of

the family home into one-person or two-person households rises, homewares such as luxury fine china and crystal

ware are also a focus.

• In developed markets, customers - their confidence knocked by the global downturn and the subsequent slow

recovery of many developed markets - are expected to favour “classic” goods which will hold their value. Luxury

writing instruments and stationery and luxury accessories should both do well, while designer clothing and footwear

is seeing a move away from the cheaper, more “aspirational” end of the luxury market to higher-priced statement

pieces.

• Super premium beauty and personal care will maintain steady growth, with skin care products traditionally popular in

Asian markets, both developed and emerging.

• A CAGR of 1% in the US luxury tobacco sales will not be enough to counteract the decline in other developed

markets, but tobacco will remain the biggest luxury category in the US and Germany by 2015, joined by China from

2012 onwards. Markets such as Poland and India are also expected to see a rise in luxury tobacco consumption,

resulting in strong emerging market growth.




11


Luxury goods categories’ differing sales performance


-2

0

2

4

6

8

10

12

14

0

10

20

30

40

50

60

70

Desig

ne

r clo

thin

g a

nd f

ootw

ear

Luxu

ry tob

acco

Luxu

ry a

ccesso

rie

s

Luxu

ry je

welle

ry a

nd

tim

ep

ieces

Fin

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Luxu

ry tra

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ood

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Luxu

ry fin

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are

Luxu

ry w

riting

in

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um

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ts a

nd

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Luxu

ry e

lectr

on

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ad

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% C

AG

R 2

01

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US

$ b

n

Luxury Goods Categories: Sales 2010 versus Developed/Emerging Market Growth 2010/15

Value 2010 Growth: Emerging markets Growth: Developed markets




12


02468

1012141618

2005/10 2010 2011 2012 2013 2014 2015

€ b

illio

n

Germany: Luxury Sales By Product Category 2005/10-2015

Designer clothing and footwear Fine wines/champagne and spiritsLuxury accessories Luxury electronic gadgetsLuxury fine china and crystal ware Luxury jewellery and timepiecesLuxury tobacco Luxury travel goodsLuxury writing instruments and stationery Super premium beauty and personal care

Luxury tobacco

0

500

1,000

1,500

2,000

2,500

3,000

¥ b

illio

n

Japan: Luxury Sales by Product Category 2005/10-2015

Designer clothing and footwear

• Japan and Germany are the only two major luxury goods markets forecast to decline over 2010-2015, but compared

to the 2005-2010 period, the rate of the contraction is expected to slow dramatically. Each market has been severely

affected by falling sales in one category: luxury tobacco in Germany and designer clothing and footwear in Japan.

• Luxury tobacco aside, the German market is expected to do well by developed market standards, forecast a CAGR

of 2.5%. Sales of designer clothing and footwear, which also fell during 2005-2010, are expected to be 14% higher

by 2015, as the key 25-39 age group takes over from the 40-55 age group as Germany’s highest earners.

• Once known as the world’s only luxury mass market, a 2003 study by the Saison Research Institute concluded that

94% of female Tokyo residents owned a Louis Vuitton handbag, even though the country had already endured a

decade of recession by then. Consumers are becoming increasingly price sensitive, buying during sales or through

outlet stores and mixing expensive pieces with cheaper items, but flat sales, even a degree of growth for several

categories, hints that the decline in sales in Japan has bottomed out, and the market has a rump of loyal luxury

consumers likely to maintain spending patterns seen in 2010. The Federation of Swiss Watchmakers, for one, noted

a positive trend in 2010, with exports to Japan up by 5% on the previous year.

Which markets will see a contraction in luxury spending?





13


The

challenge:

to remain

selective

while

accessing

enough

customers

and sales.

Can the

two

elements

co-exist?

Maintaining a luxury brand image and price

Using exclusivity to maintain price points and attract highest

income consumers

Only selling through luxury retail environments; creating

premium selling environments (flagship stores)

Controlling inventory and brand exposure

Generating sales in a changing market

Widening market coverage

Harnessing the sales potential of aspirational consumers

Publicising the brand

Expanding the customer base

Leveraging wholesale activity

Creating an online presence

The central dilemma of luxury distribution





14


Category Key markets Distribution mix 2011

Designer clothing and

footwear

Japan, US,

Italy

Department stores, boutiques,

owned stores, internet

Fine wines/

Champagne and spirits Japan, UK, US

Wine specialists, department

stores, direct selling, online

Luxury accessories US, Japan,

Italy

Department stores, flagships,

owned stores, internet, opticians

Luxury electronic

gadgets

China, Japan,

Turkey

Owned stores/flagships,

department stores, jewellers,

duty-free, hotels, online

Luxury fine china and

crystal ware

China, France,

UK Department stores

Luxury jewellery and

timepieces

US, Japan,

France

Jewellers/specialists,

department stores, owned stores

Luxury tobacco US, Germany,

China

Specialists, department stores,

mail order/online/members clubs

Luxury travel goods US, Japan,

China

Owned stores, department

stores, duty-free, hotels, online

Luxury writing

instruments and

stationery

US, Japan,

China

Department stores, owned

stores, specialists, online

Super premium beauty

and personal care US, China, UK


stores, duty-free, online

Which industries rely on which formats?


Age restrictions complicate online

sales for this category, but an

international customer base and

the relatively transportable nature

of the product both suit the format.

Mail order wine clubs, specialist

sellers and direct sales from

vineyards are making a smooth

transition to e-commerce.

Declining numbers of department

stores in some key markets,

particularly Japan and the US, has

been a major issue for super

premium brands. Branded

boutiques, duty-free environments

and wooing influential bloggers

have helped to replace concession-

counter “face time”.

When it comes to wholesale doors,

exclusivity is key in this channel. In

2009-2010, Cartier withdrew from

40% of its US wholesale

distributors in order to prevent

overstock issues.




15


DOS

Flagship

stores

Licensed

stores

Third party

boutiques

Department

stores

Branded

websites

Third party

online

Outlet

stores

Exclusivity

Premium brand image

Selling to high-income

consumers

Maintaining price

strategies

Driving volume sales

Anti-counterfeit

Selling to aspirational

consumers

Resilient to recession

High growth potential

Suited to developed

markets

Suited to emerging

markets

Cost implications

Luxury’s shifting business model for 2011 and the short term


Obstacle Driver




16


Introduction






Conclusion




17


Wh

ole

sa

le

• Definition: Sales through third party distributors

• Traditional formats: Department stores, boutiques

• Emerging formats: Outlet stores, e-boutiques

• Many luxury brands moved away from wholesaling during the recession as retailers began implementing steep discounts.

• The once-key department store channel is suffering a decline so luxury brands are wise to explore other options.

• Outlet stores, factory shops and online boutiques such as Net-A-Porter offer growth at both the lower and upper ends of the luxury market.

Re

tail

• Definition: Distribution managed in-house

• Traditional formats: Company owned/franchised branded stores

• Emerging formats: Brand websites, social networks

• Company owned/franchised stores allow brands to control pricing, but as luxury’s international consumer base widens, their contribution to creating and maintaining a brand image may be even more crucial.

• Websites and social networking presence are increasingly recognised as another important brand imaging tool, with the potential to bring new consumers into stores.

Inte

rne

t R

eta

il

• Definition: Sales transactions are completed online. Can operate as both a retail and wholesale distribution channel

• Traditional formats: Websites operated by established retailers such as department stores, wine clubs; fashion e-boutiques

• Emerging formats: Transactional branded websites, luxury outlet e-stores, m-commerce, iPad applications, social networking

• The use of websites as brand showcases is relatively well established, but the internet is only now gathering momentum as a luxury distribution channel.

Routes to market: Wholesale formats


Definitions are for the purposes of this report. Company-specific definitions may vary




18


Luxury wholesale: The good

Luxury wholesale: The bad

Counterfeiting issues

Brand over-exposure/Loss

of exclusivity

Unwanted discounting

Unpredictable purchase patterns

Prestige stores enhance brand

image

Spreading risk

Cost-effective expansion

Performance measure alongside

competitors

Luxury wholesale: Risk and rewards


• Luxury wholesaling - selling goods to

third parties rather than controlling all

distribution in-house - has become

less attractive to luxury brands since

the recession hit.

• Third party retailers became less

reliable as customers because of

bankruptcies and cautious buying in

the wake of the downturn, while deep

discounting programmes caused

widespread damage to brand pricing.

• Counterfeit goods are harder to

control for brands which are known to

use wholesale distribution.

• In addition, the decline of the

aspirational luxury market has left

brands more reliant on the top end of

the market, meaning that brand

image, exclusivity and sales

environments grew in importance.

• However, using wholesale

distribution gives luxury brands

access to a much wider consumer

base without requiring major

investment, and presence at the very

best stores can enhance a brand’s

image, or even add a fresh

dimension to it.

Wider market

exposure




19


• The department stores channel saw steep sales falls in 2007-2009 as non-grocery sales were hit by the credit

crunch, before bouncing back to 4.5% in 2010, led by China and a resurgent US market.

• In the US, the merger of the Federated and May department store groups in 2005 had already resulted in a number

of store closures before the downturn resulted in deep discounting and several bankruptcies: a distribution problem

for luxury brands.

• Nearly 20% of Japan’s department stores have closed over 2005-2010, but the channel remains an important outlet

for luxury brands, many of which operate their own shops within department stores.

• Top luxury department store banners such as Isetan, Mitsukoshi and Takashimaya all saw sales declines of 4-5% in

2010 on the back of years of negative growth. With department store sales expected to fall by another 14% to 2015,

luxury brands will be forced to explore other distribution avenues.

• Chinese department store numbers are growing rapidly as chains expand into smaller cities, but in the saturated

first-tier markets, it is demand for luxury products that is pushing sales higher.

Growth in US and China props up department stores channel





20


Department store channel: Store numbers vs value sales


China

UK

US

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010

Ou

tle

ts

Department Stores: Outlet Numbers 2005-2010

Russia

Japan

China

UK

US

0

50

100

150

200

250

300

350

400

450

500

2005 2006 2007 2008 2009 2010

US

$ b

illio

n (

con

sta

nt 2

01

0 p

rice

s,

fixe

d 2

01

0 e

xch

an

ge

rate

s)

Department Stores: Value Sales 2005-2010

Japan

Singapore

South Korea

Australia

Saudi Arabia

UAE

Canada

US

France

Germany

Italy

Portugal

Spain

Sweden

Switzerland

UK

China

India

Malaysia

Poland

Russia

Brazil

Mexico

South Africa

Turkey

Japan

South Korea




21


Super Premium Department Stores vs

Overall Channel Growth 2005-2010

Super premium department stores avoid credit crunch pain


• Super premium department stores rose above

recessionary pressures in 2007-2010, even in

hard-hit markets such as the UK and Russia.

• Before the recession, many of these stores had

been seeing growth on a par with, or even

below, the overall department stores channel,

making their strong performance during the

global economic downturn even more

remarkable.

• The very high incomes enjoyed by the customer

base of these super premium retailers may have

seen some impact from the global recession,

but luxury products remained easily affordable.

• “[US$10 million in liquid assets] is a level of

wealth where people feel protected from the

hazards of the world.” Milton Pedraza, Chief

Executive of the Luxury Institute

• However, the downturn made some consumers

re-assess their attitudes to luxury purchases,

resulting in less conspicuous consumption and

even delayed purchases for a time, but in 2010

this sense of purchasing “penance” was already

fading.

• Longer term, the focus of luxury consumers in

developed markets is expected to shift towards

luxury experiences rather than luxury

possessions; an area that top department stores

must work to exploit.

-60

-40

-20

0

20

40

2005-6 2006-7 2007-8 2008-9 2009-10

% y

-o-y

gro

wth

Russia GUM

Bolshoy GostinyDvor

Total departmentstores channel

-10

-5

0

5

2005-6 2006-7 2007-8 2008-9 2009-10

% y

-o-y

gro

wth

France

Le Bon Marché


-10

0

10

20

30

2005-6 2006-7 2007-8 2008-9 2009-10

% y

-o-y

gro

wth

UK Harrods

Liberty

Fortnum & Mason





22


• Luxury retail is an international business; consumers do not consider themselves tied to

their domestic markets. The fluctuating currency rates of the past 2-3 years have played

their part in shaping luxury retail, with destinations such as London benefiting from an influx

of visiting consumers taking advantage of the weak pound.

• High-profile department stores have benefited, and have tailored their marketing

campaigns accordingly; brand flagships - designed to enhance brand image abroad as well

as to generate sales - have also been developed with foreign consumers in mind.

• The strong yen has been bad news for Japan’s beleaguered department stores; not only

has it reduced the buying power of visiting tourists, but rises in the consumer price index

led to Japanese shoppers visiting other markets in Asia for their luxury shopping.

• During 2009, when exchange rates peaked at won16 to the Japanese yen, almost double

2008 figures, the number of Japanese visitors to South Korea rose by nearly a third. Major

department stores hired Japanese-speaking assistants to take advantage of the influx.

• Chinese consumers have also become a significant force in developed luxury markets,

estimated to account for 30% of all luxury goods sales in the UK, for example. China’s high

import duties make luxury prices overseas even more attractive.

Currency fluctuations influence luxury retail destinations


0

50

100

150

200

250

Exch

an

ge

rate

ind

ex

Ja

nu

ary

20

11

Purchasing Power: How Exchange Rates Are Affecting Luxury Consumers' Ability to Buy. Exchange Rate Index (July 2008 = 100)

Chinese consumers

Japanese consumers

European consumers

US/UAE/Saudi consumers

Russian consumers

British consumers

X signifies domestic buying power,

calculated using the Index of Item Prices

Harvey Nichols, London:

launched its “Tourist”

campaign in mid-2009,

featuring foreign

language advertisements




23


• Harvey Nichols (UK): International expansion began in

2000 with entry into Saudi Arabia (Riyadh); to date there

are stores in Hong Kong, Ireland (Dublin), the United Arab

Emirates (Dubai), Turkey (Istanbul, Ankara) and Indonesia

(Jakarta).

• Bloomingdales (US): High-end New York retailer opened its

first overseas store in Dubai in February 2010.

• Saks Fifth Avenue (US): Licensed stores now located in

Saudi Arabia (Riyadh, Jeddah), United Arab Emirates

(Dubai), Mexico (Mexico City), Bahrain (Manama)

• Galeries Lafayette (France): Germany (Berlin), United Arab

Emirates (Dubai)

• Harvey Nichols has two new stores planned, in Hong Kong

(2011) and Kuwait (2012).

• Three of London’s most renowned single-outlet department

stores have indicated they may open overseas stores:

• Harrods, recently acquired by Qatar Holdings, is now

considering entry into China, with a store in Shanghai;

• Fortnum & Mason has confirmed that international

expansion is being looked at; likely locations are China, the

Gulf States and, longer term, India;

• Liberty was rumoured to be investigating internationalisation

using money from the sales and leaseback of its iconic

London store in 2009: no plans have yet been announced.

Western department stores head east in search of sales


Moving east

Looking eastwards

• Faced with sluggish or declining home markets,

department stores in developed regions are now

looking overseas for further growth potential.

• Countries such as the Gulf states, where there is

already an established base of luxury consumers but

where the department stores channel is less saturated,

have been a popular destination; Dubai in the United

Arab Emirates and Riyadh in Saudi Arabia in particular.

• Moves into other developed markets, such as

Selfridges’ entry into Ireland, have become a rarity.

Galeries Lafayette does still operate the Berlin store

that it opened in 1995, but its attempt to enter the US

market failed. Similarly, Japanese banner Mitsukoshi

exited Germany, France and Spain during 2009-2010.

• Now even the most august names in department store

retailing - Liberty, Fortnum & Mason and Harrods - may

be about to move beyond their single-store model.

• For Harrods, in particular, store expansion involves an

additional layer of risk. As one of the world’s leading

super premium department stores, it caters to a highly

cosmopolitan, international consumer base that sees

few difficulties in travelling to London to shop.

• Industry commentators have pointed out that a second

flagship, located in Shanghai, could damage Harrods’

air of exclusivity and, while it might attract more

shoppers of a lower income level, the move might not

find favour with the very richest consumers.




24


• Mitsukoshi (Japan) still operates a store in both Italy

and the US, but is now focused on expansion in Asia,

particularly Taiwan (18 stores) and China (Shanghai).

• Isetan (Japan) expanded into Singapore in 1971, and

now has stores in Thailand, Malaysia, Taiwan and China.

• Lotte Group (South Korea) signed a joint venture with

Intime which resulted in the Intime Lotte Department

Store opening in Beijing, but it recently revealed that it

will be opening some 20 of its own stores by 2018.

• Central Retail Corp (Thailand) launched its first

Chinese department store in 2010; more are planned.

• There is an undeniable interest in the high-growth Chinese

economy from Western luxury department stores, but so far it

is other Asian department store banners that have made

inroads into the market.

• Despite the closure of two underperforming Isetan stores and

occasional flare-ups of anti-Japanese sentiment, China

remains a key focus of owner Isetan-Mitsukoshi’s expansion

plans. The remaining Mitsukoshi stores in Europe and the US

seem increasingly peripheral to the company’s plans.

• Saks Fifth Avenue is arguably the Western banner that has

come closest to entry into China. It signed a licensing

agreement with Roosevelt China Investments Corp in 2006

to develop stores in China and Macau. However, the first

store, due to be opened at a high-profile site in Shanghai,

never launched; thwarted, reportedly, by the economic

downturn, though the subsequent launch of the high-end

House of Roosevelt on the site suggested that Shanghai’s

luxury market still had room to grow.

• US-based Saks might be better off focusing on expansion in

nearby Latin America. It is already present in Mexico, where

the luxury goods market is forecast to grow by 26% to 2015,

but Brazil, where 20% growth to 2015 will add US$1.4 billion

to the market, arguably offers even stronger prospects.

• In contrast, the Chinese market could be a good direction for

Australian department stores David Jones or Myer to move

in; geographically closer than most other first world chains,

they also have experience of Chinese consumers, who

currently make up over 3% of Australia’s population.

Eastern department stores make progress in China


• Mitsukoshi (Japan) - expanded into a number of

European markets during the 1970s, but withdrew

from Germany (3 stores), France (1 store) and Spain

(1 store) in 2009-2010. The Hong Kong store was

closed in 2006 after 25 years; although it was not an

official market exit, no new store has replaced it.

• Saks Fifth Avenue (US) had planned to enter the

Chinese market with a store in Shanghai’s upmarket

Bund district, but plans reportedly lost momentum as

a result of the economic downturn. The site is now

occupied by House of Roosevelt, a massive wine

merchant/members club/restaurant concept store.

U-turns

East to east




25


-30%

-20%

-10%

0%

10%

20%

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

% g

row

th

Neiman Marcus: Store-Based vs Non-Store Sales Q1/06 - Q1/11

Speciality retail stores Direct Marketing division

• Compared to the rest of the luxury industry, US premium department stores have been some of the earliest adopters

of internet retailing, and online sales are becoming an increasingly important part of their business model.

• Neiman Marcus launched neimanmarcus.com in October 1999, but although long-standing exposure to remote sales

through its mail order catalogues made the transition a logical one for both retailer and consumer, the migration

online has led to a marked uptick in the importance of non-store activities to overall group sales.

• Between 1995 and 2000, the percentage of sales generated by the Direct Marketing division drifted down slightly

albeit remaining at around 13%. By 2005, the trend had reversed; non-store sales accounted for nearer 16%, by

2010 nearer 19%. By then, online sales were generating the lion’s share of non-store revenues, making up 16% of all

Neiman Marcus Inc’s sales. Throughout the economic crisis, the Direct Marketing division proved more resilient than

Neiman Marcus Group’s store-based operations; slower to go into negative growth during the downturn than store-

based sales, and quicker to recover.

• Neiman Marcus’ stable of websites have been operating within a relatively sparse competitive environment, but as

more of the luxury brands it features develop their own e-commerce capabilities, competition will increase. The

company has been strengthening its luxury and fashion credentials, most recently with the launch of fashion blog

NMdaily in March 2011, but - luxury industry or not - the leveraging of more prosaic positives, such as the option to

collect-in-store and return products to store, could be even more important to long-term growth.

Putting luxury online: Neiman Marcus, US





26


• Outlet offshoots are not a new development for department stores,

but their profile was certainly raised during the recent economic

downturn. Nordstrom Inc was particularly active in terms of network

expansion, adding 20 outlet stores, which it operates under the

banner of Nordstrom Rack, between 2008-2010, compared to just six

full-line stores.

• Nordstrom Racks are used to clear surplus stock from the full-line

stores, but they also buy products directly from manufacturers. As the

number of Nordstrom Rack outlets increases, it may become harder

to maintain the perception that its product mix is closely related to the

full-line stores, leading to a loss of cachet for the Rack brand.

• Like rival Neiman Marcus outlet banner Last Call, Nordstrom Rack

launched its e-commerce site in October 2010. This enables

Nordstrom Rack to tap into a wider consumer base, but again,

increases the pressure on its ability to offer desirable, brand name

goods at large discounts and runs the risk of the Nordstrom name

being associated with discount, rather than premium, retailing.

• The fewer-frills approach of a Nordstrom Rack outlet compared to a

full-line store may keep operational costs down, but the performance

of both the Nordstrom Rack stores and the existing full-line stores are

affected by the profile and image of the premium store portfolio, and

will suffer if this is allowed to dwindle.

• The strategy of prioritising Rack stores over full-line outlet expansion

looks set to carry on unabated during 2011, with 18 Nordstrom Rack

openings planned for the year compared to just three new full-line

stores. However, same store sales growth for full-line stores has now

returned to positive territory; in 2012, it could be time for Nordstrom

Inc to prioritise its full-line stores once more.

Department store outlets vs full-line stores: Nordstrom, US


-20

-10

0

10

20

30

-40

0

40

80

120

% y

-o-y

sa

les g

row

th

Sto

res

Nordstrom Inc: Nordstrom Rack

Store Numbers and Sales Growth 2005-2011

Store numbers Same store sales growth

-20

-10

0

10

20

30

-40

0

40

80

120

% y

-o-y

sa

les g

row

th

Sto

res

Nordstrom Inc: Full-Line Stores Store Numbers and Sales

Growth 2005-2011

Store numbers Same store sales growth

Note: * planned stores




27


Third party boutiques: Pros

Widens geographic reach with minimum investment from luxury brand owner

Premium boutique environments can add cachet, and have the potential to be used to improve/update positioning if desired

Accesses different consumer base to brand boutiques

Third party boutiques: Cons

Less control over pricing

Less control over stock levels/ordering cycles

Less control over brand image

Third party retailing can provide cover for counterfeit goods

Less potential to use in-store experience as a pro-active marketing opportunity

• Attitudes of luxury brands towards multi-brand boutiques run by third

party retailers vary.

• Some brands, such as Louis Vuitton, Hermès and Tod’s, avoid this

route completely, preferring to maintain full control over their

distribution by using stores that are either fully owned, controlled via

franchise agreements or department store concessions. This strategy

also makes it harder for counterfeiters to sell goods; if it is not sold

through one of their own, branded stores, it is not an authentic product.

• Other brands are available through third party boutiques, particularly

smaller or newer operations which lack the resources for a wide

distribution network of their own.

• The recent economic downturn saw deep discounts being offered by

third party retailers desperate to get rid of unsold stock, making it very

difficult for brands to maintain price points elsewhere. Bain & Co

highlighted markdowns as a key factor in its estimate of an 8% fall in

Q4/2008. The brands then suffered a double impact, as retailers were

cautious about buying more stock, resulting in a subsequent dip in

wholesale orders.

• This forced many brands to reassess their relationships with third party

stores and even franchise partners. Control has become a higher

priority; shifting to more owned stores (Polo Ralph Lauren), buying up

franchise partners (Hugo Boss, Burberry) and rejecting third party

retailers whose store environments do not support the brand

positioning (Cartier).

• As luxury sales recover, and growth targets for brand manufacturers

become more ambitious, third party retailers will rise in importance.

Brands need to remember the lessons learned as their strategies for

dealing with third party stores develop.

Third party boutiques: Help or hindrance?





28


A prestige environment for luxury brands?

• The market for fine wines/champagne and spirits in

China has tripled over 2005-2010, and is expected

to double again over 2010-2015. By 2015, the

market will be worth US$1.2 billion, which House of

Roosevelt is clearly hoping to tap into.

• This boutique benefits from a premium location with

a lengthy history, which has given it an instant

“heritage” factor. The owners have put much effort

into creating several premium environments for its

premium clients and premium products, but the

wide clientele that the concept targets makes a

luxury positioning harder to sustain.

• House of Roosevelt would benefit from further

support for its upmarket positioning, for example

the presence of more luxury brand boutiques to

stand alongside Rolex.

Boutique case study: House of Roosevelt, Shanghai


USP: Hybrid format in high-profile site catering to a variety of consumer

bases within the fast-growing Shanghai market.

Key point: An ambitious large-scale format for a fast-growing emerging market -

but having to attract a wide range of customers in order to pay its way

could damage its luxury credentials. Is a clearer positioning needed?

Key facts:

• Launched: September 2010

• Owner: Roosevelt China Investments Corp

• Located in the former Jardine Matheson HQ, a prestigious

building in Shanghai’s exclusive Bund district. In 2008, it was

planned to be the location of the first Saks Fifth Avenue

department store in China, but the economic downturn forced

Saks to rethink its plans.

• House of Roosevelt is an unusual hybrid format: featuring a

1,000 sq m Rolex store on the ground floor as well as a

brasserie where dishes cost from US$10, a wine “cellar” on the

first floor, an elite members club on the second floor complete

with dedicated cigar lounge (a 3-year membership costs

RMB180,000 (US$27,000)), and a restaurant and high-end

roof-top bar on the eighth and ninth floors targeted at

Shanghai’s “fashionista” crowd; other levels are still being

renovated.

• The 1,100 sq m Wine Cellar offers over 20,000 bottles of wine

at prices ranging from RMB65 to RMB500,000 (US$10-

US$74,500). A “secret” cellar behind a sliding shelf contains

super premium products.




29


A prestige environment for luxury brands?

• Colette’s regular updating of its in-store range puts any

brand on its shelves firmly “on trend”; a valuable

attribute even for established luxury brands.

• However, the Colette product range is perhaps so

special that it is difficult for brands to stand out, which

may explain the number of exclusive collaborations

that the store is able to garner, not to mention other

initiatives such as limited-time shop-in-shops.

• Colette has even managed to transfer some of its

unique cachet online, with the help of numerous blogs,

and should benefit from its international reputation

though, as in the store, relatively few customers will be

able to afford the fashion on offer.

• However, does Colette risk becoming a victim of its

own success if its reputation begins to attract too many

“ordinary” visitors, diluting the “street” atmosphere?

Boutique case study: Colette, Paris


USP: Achingly hip boutique which has built an international reputation through

its mix of luxury products and street-style brands across a variety of price

points. Essentially, Colette sells style, rather than products.

Key point: Colette covers a wide price range, but the concept has a clear positioning

in terms of the style-savvy customer it targets. The weakness in its

business model comes from the reliance on its founders, who still control

the selection of products. No further stores are planned, and even the

current store could struggle to maintain its profile if it changed ownership.

Key facts:

• Launched in March 1997 by mother-and-daughter team

Colette Roussaux and Sarah Lerfel.

• Located at 213 Rue Saint-Honoré, in a district of Paris

known for its fashion and luxury offer.

• Collette comprises of three floors covering 740 sq m. The

ground floor offers streetwear labels, as well as gifts,

gadgets and CDs; upstairs is devoted to luxury clothing by

both established brands and cutting edge emerging

designers while the lower level is a fashionable bar, which

only serves water (over 100 kinds). The store also

regularly hosts exhibitions by artists and designers.

• Colette is also known for its exclusive collaborations with

fashion designers and other celebrities; it was also

recently chosen as one of only four outlets in the world to

stock US apparel market leader Gap’s collaboration with

Valentino.




30


Introduction






Conclusion




31


Wh

ole

sa

le







Re

tail


• Traditional formats: Company owned/ franchised branded stores


• Company owned/ franchised stores allow brands to control pricing, but as luxury’s international consumer base widens, their contribution to creating and maintaining a brand image may be even more crucial.


Inte

rne

t R

eta

il




• The use of websites as brand showcases is relatively well established, but the internet is only now gathering momentum as a luxury distribution channel.

Routes to market: Retail formats






32


Luxury retail: The good

Luxury retail: The bad

Luxury retail: Risk and rewards


• There has been a shift towards retail sales, where

distribution is controlled by the company itself, in

recent years; even to the extent of some brands

buying up franchised stores.

• The ability to retain control over pricing has been

an important element of this, after deep discounting

by third party retailers in the wake of the economic

downturn damaged some wholesale relationships.

• Having closed between 120-140 wholesale

accounts in the US that it felt were

underperforming, Cartier, for example, was able to

prioritise its own stores, and better support

wholesale retailers that were performing strongly

and supporting brand positioning.

• Controlling its own stores also gives companies

more control over brand image and direct contact

with consumers.

• Several brands have recently also taken control of

distribution in the Chinese market which should

help to differentiate the label within an increasingly

competitive market.

• Large-scale expansion remains difficult for brands

bearing all the set up and running costs

themselves, but the internet is now widening

options for international sales, not only through

transactional websites but also through initiatives

such as live catwalk streaming and social

networking sites.

Direct customer contact




33


• 2009 was a bad year for wholesale luxury

distribution, with massive drops in sales posted by

some of the leading luxury groups; a development

that looks even worse when viewed alongside a

much more positive growth trend for company-

controlled retail activity.

• Better store environments and avoidance of

discounting were some of the reasons for retail’s

stronger performance, along with the ongoing

expansion of company-controlled store networks.

• Luxury brands were hit by a fall in wholesale orders,

made worse in some cases by stock being withheld

from wholesale customers considered to be risky,

and restrictions on inventory at third party retailers in

order to maintain exclusivity and limit discounting.

• Wholesale revenues are now widely reported to be improving

(though this may in part be due to greater control over

inventory levels and pricing by brands), but the shift towards

directly-operated stores is still evident.

• A secondary trend during 2009-2010 was the appearance of

more flagship stores, from Burberry’s high-tech Beijing store

to Louis Vuitton’s Maison London. The value of these stores

is to promote the brand to both domestic and overseas

consumers, as much, if not more, than any effect on sales.

• Obvious benefits of directly-operated stores include greater

control over store environment and pricing, higher margins

on sales and less vulnerability to weak retail partners. They

also give brands more control over their image, and foster

customer relationships through face-to-face contact; factors

which will become more important as online selling grows.

Shift to owned stores keeps brands close to consumers


“The best communication

vehicle we have is the stores.”

Patrizio di Marco, President

and CEO, Gucci

“Louis Vuitton and Hermès

control their distribution

channel from A to Z and they

don’t discount.”

Milton Pedraza, Chief

Executive of the Luxury

Institute

-30

-20

-10

0

10

20

Prada (YE January2010)*

Polo Ralph Lauren (YEApril 2010)

Hugo Boss (YEDecember 2009)

% y

-o-y

gro

wth

Wholesale vs Retail Growth 2009

Retail Wholesale* wholesale figures include 35

franchised stores/2009




34


Flagship stores support high-end luxury positioning


• Luxury brand flagship stores formed another clear trend in 2010,

mainly driven by brands’ need to re-emphasise their high-end

positioning and target the more resilient super-rich market.

• Rents and occupation levels at the best retail locations remained

stable during the downturn, but many retail development projects

were put on hold. This limited the number of suitable mall-based

locations for premium brands, and made them more aggressive

about securing good standalone sites.

• Flagships complement another current trend, of offering in-store

experiences in order to add value of the brand in consumers’

eyes. The Gucci Artisan Tour, for example, which sets up in-store

workshops so customers can see the detail that goes into the

products, will be finishing at the brand’s Fifth Avenue, New York,

flagship store in April 2011.

• Despite the headline growth of the Chinese market, many of

2010’s flagship openings were in developed regions. However,

impressing and attracting overseas customers is an important

part of the function of such stores, particularly as many Chinese

visitors prefer to buy abroad in order to avoid high luxury taxes.

• In the future, flagships may not always be physical stores, as the

launch of the Gucci.com “digital flagship” demonstrates.

• “The more we elevate our stores and the merchandise mix, the stronger the customer response.” Polo Ralph

Lauren, Q3/2011

• “Success of upscale positioning strategy.” One reason given by Gucci for a strong rise in fiscal 2010 sales

• “Sharp turnaround in profitability fuelled by Couture.” YSL accounts for a 13% rise in fiscal 2010 revenues

• "We will invest more in turning old stores into flagship-style stores in the next five years rather than opening up new

stores, because you need to keep Fendi really in the high end.” Fendi CEO Michael Burke, 2009

Major flagship openings in 2010:

• London, May: Louis Vuitton’s new Maison in

prestigious New Bond Street opens its doors.

• Milan, September: Jimmy Choo’s new flagship

features its first European VIP room.

• Beijing, October: Emporio Armani unveils 5-

storey, 1,600 sq m site.

• New York, October: Ralph Lauren opens flagship

for womenswear and home collections.

• Hong Kong, November: Cartier replaces 40-year-

old store with a much-enlarged flagship.

• Beijing, November: Hublot’s first standalone

flagship in China.

• Paris, November: Hermès opens a new home

market flagship, but with an eye on tourist spend.

• New York, December: Dior reopens its 57th

Street flagship after extensive renovations.

• London, December: New Bond Street welcomes

another flagship: accessories brand Mulberry.




35


• Opening stores in away-from-home locations,

such as travel environments, gives luxury

brands the opportunity to target luxury

consumers at a time when they are likely to

have time on their hands, are likely to be

looking for gifting purchases and there are

fewer non-retail distractions.

• Duty-free areas are the obvious example, and

these locations offer some very distinct,

advantages. They distil the luxury potential of

an airport’s catchment area, by providing a

single location - free of taxes - that almost all

luxury consumers must pass through if they

travel. Moreover, they can operate separately

from the market where they are geographically

located.

• Leading global drinks company Diageo has

tapped into this in Dubai, first by offering one-to-

one tasting sessions for its most luxury brands,

and then by opening Emporium, a luxury

cocktail bar/retail concept store in December

2010, in association with Moët Hennessy.

• The Middle East is seen as a region with

untapped potential for luxury alcohol sales, but

there are issues over religious sensitivities. As

Dubai Airports CEO Paul Griffiths pointed out

however, “We see the airport environment as

separate and distinct from the local market.”

Capturing the consumer: Luxury retail in travel locations


-40

-20

0

20

40

60

0 20 40 60 80 100 120 140

% g

row

th in to

urist e

xp

en

ditu

re o

n s

ho

pp

ing 2

00

8-2

01

0

Departures + arrivals 2010 (million trips)

Tourism Flows vs Expenditure on Shopping 2008-2010

China

Hong Kong, CN

India

Japan

Malaysia

Singapore

South Korea

Australia

Poland

Russia

Brazil

Mexico

Saudi Arabia

South Africa

UAE

Canada

USA

France

Germany

Italy

Norway

Portugal

Spain

Sweden

Switzerland

UK

Bubble size represents tourist expenditure on shopping 2010




36


• Top hotels offer a captive audience of high-income consumers, which

have long attracted luxury brands. Hotel retail offers brands insight

into the tastes and preferences of a very tightly-targeted demographic.

• Like duty-free areas, they are also able to exist apart from the local

economic and retail environment, because, by definition, luxury hotels

already provide the right demographic of high-earning individuals.

• Hotels such as The Peninsula in Hong Kong (est. 1928) created some

of the earliest versions of luxury malls; the shopping arcade in The

Peninsula still house over 80 shops, including Louis Vuitton, Chanel

and Prada.

• In emerging markets, high-end hotels are still key locations for luxury

brand retail, partly because of the way they target HNWIs, but also

because they represent safe, secure and luxurious retail

environments, which may otherwise be in short supply.

• India is a typical example: it is viewed as one of the highest potential

luxury markets in the world, but the lack of luxury retail malls has

prevented brands from expanding as fast as they would like. Luxury

malls only appeared in the Indian market in 2008, and are still only

present in the very largest cities: the DLF Emporio in Delhi, UB City in

Bangalore and Palladium in Mumbai. However, 35% of hotel spend is

in luxury grade accommodation, and as luxury brands look to widen

their presence in other cities, premium hotels remain one of their few

store location options.

• Combining the elements of luxury hotels with duty-free retail, luxury

cruise liner passengers are perhaps the ultimate captive luxury

audience. Here too, luxury brands have looked for retail opportunities:

the Mayfair shopping arcade on Cunard’s latest luxury liner, the

Queen Mary 2, includes Hermès and Chopard stores.

The original luxury store location: High-end hotels


0 25 50 75 100

FranceChinaJapan

MalaysiaCanadaTurkey

GermanyPoland

South AfricaUK

ItalySaudi Arabia

RussiaIndia

SpainSwitzerland

SingaporeSouth Korea

SwedenBrazil

PortugalAustralia

Hong Kong, CNUSA

MexicoUAE

% of total expenditure

Expenditure on Luxury Hotels as a Percentage of Total Expenditure on Hotels

2008/2010

2008

2010




37


• The outlet mall format was first developed in the US in the

1970s, spread to Europe and Japan in the early 1990s and

has now begun to appear in emerging markets such as China,

Mexico and Malaysia.

• There are now several operators that focus on the luxury end

of the market, though even in designer outlet malls, high-

street banners will be present alongside luxury brands.

• Luxury brands that are very active within designer outlet

centres include Polo Ralph Lauren, Hugo Boss and Burberry.

• In its most recent results announcement however, Burberry

stated that growth in its mainline stores had substantially

outperformed outlet sales; in part because of “the deliberate

strategy on our part of having less inventory flowing to outlets”.

• Brands such as Burberry, whose 46 outlets constitute around

10% of its retail stores, need to provide a significant amount of

merchandise to stock these low price formats. As brands

focus on full-price merchandise and exclusivity in the wake of

the economic downturn, rather than the aspirational customer

base, low-price formats like outlet malls could fall out of favour.

• Other luxury brands are only present in a small number of

outlet malls, simply to clear out excess stock; for these, online

members shopping clubs could provide a viable alternative.

• However, outlet malls also offer some strong positives for

luxury brands: offloading excess stock in a relatively controlled

environment; providing a reliable sales channel without the

expense of a luxury retail environment; and combating

counterfeiting by offering a lower-cost branded option for

aspirational consumers.

• Simon Property Group’s Premium Outlets brand

has been the most vigorous in terms of international

expansion; now present in Japan, South Korea and

Mexico and due to launch in Malaysia in 2011.

• As more outlet malls expand into emerging markets,

affluent areas with high tourist flows will be key sites.

• Tourists are a major consumer group (double-digit

growth achieved by Chic Outlet Shopping in Q3

2010, for example, was generated by an 81%

increase in tax-refunded sales during the period).

• Nevertheless, premium outlet centre operators tend

to be very regionally orientated, despite their

international customer base.

A threat to exclusivity? Designer outlet malls


19 9 11 58

11

32

0

20

40

60

80

100

US Europe Other

Num

be

r o

f o

utle

ts

Key Premium Outlet Centre Operators US/Europe/Other 2010

Tanger Factory Outlet Centers Inc (Tanger Outlets)Simon Property Group Inc (Premium Outlets)Neinver SA (Factory, The Style)Value Retail Plc (Chic Outlet Shopping)McArthurGlen Group (Designer Outlet)

Source: Company information




38


Introduction






Conclusion




39


Wh

ole

sa

le







Re

tail


• Traditional formats: Company owned/ franchised branded stores


• Company owned/ franchised stores allow brands to control pricing, but as luxury’s international consumer base widens, their contribution to creating and maintaining a brand image may be even more crucial.


In

tern

et R

eta

il




• The use of websites as brand showcases is relatively well-established, but the internet is only now gathering momentum as a luxury distribution channel.

Routes to market: Online formats






40


Luxury online: The good

Luxury online: The bad

Luxury brand transactional websites: Risk and rewards


• Questions over whether luxury goods

could be successfully sold online have

largely been answered by the success

of sites such as Net-A-Porter and the

growth being seen by department stores

for their online activities.

• The internet’s potential to showcase

brands is already being explored; for

some categories, such as fine wines

and jewellery, informative websites can

help to dispel “boutique fear”, helping

new customers (particularly in emerging

markets) to discuss prospective

purchases more knowledgeably.

• For brands which suffer badly from

counterfeiting, such as Louis Vuitton,

the internet allows them to sell to more

customers without ceding control of any

of the distribution or bearing the

expense of a multitude of new stores,

but internet sales via third parties could

equally lead to a rise in counterfeiting.

• For luxury brands, the decision to sell

via their own, branded, website, is a

difficult one. Can the channel provide

enough of a luxury level experience to

maintain price levels in the long term?

Attracts boutique-shy customers




41


• The online presence of luxury brands varies by product category, but over the past decade there has been a

significant move online, even if only to showcase a luxury brand to a wider audience.

• Designer clothing and footwear has been the most progressive in terms of online selling, inspired by the example of

Net-A-Porter, with luxury accessories and now beauty and personal care gaining momentum.

• Companies, such as Tiffany & Co and luxury wine clubs such as The Wine Society, which have already sold via mail

order, have made a natural migration to e-sales, even within categories with an otherwise limited online presence.

• Luxury mobile phone and watch brands selling online are still surprisingly rare. Although they have tech-savvy

customers, store-only sales (or a personal visit by a representative) lend an aura of exclusivity for these high-price items.

Website profile by category highlights online inconsistencies


Key: Few brand-

operated websites

Websites used as

brand showcases

Transactional

websites common

Designer clothing and footwear

Fine wines/Champagne and spirits

Luxury accessories

Luxury electronic gadgets

Luxury fine china and crystal ware

Luxury jewellery and timepieces

Luxury tobacco

Luxury travel goods

Luxury writing instruments and stationery

Super premium beauty and personal care




42


Internet retailing was

seen as the home of

discount brands and

bargain hunters and

Net-A-Porter

launched just as the

internet bubble burst

in 2000; but sales

figures have proved

to the world that full-

price luxury fashion

can be sold online.

The luxury industry

has taken note.

11.8 21.3

36.5

55.2

81.5

120.0

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010

Net-A-Porter Annual Sales 2005-2010

Sales (£ million)

Key event: Net-A-Porter paves the way for online luxury


A rigorously edited product range has

been key to Net-A-Porter’s success, and

the exclusive products that this powerful

site can now command, such as the above

collaboration with Burberry Prorsum,

enhance its cachet still further.

Future prospects: Will Net-A-Porter be a victim of its own

success?

• Net-A-Porter has established itself as a leader in website execution,

and is still driving development through initiatives such as its iPad app.

• This should “future proof” the business model, but by demonstrating

the potential of luxury online retail, Net-A-Porter led to countless luxury

brands launching their own sites, many with e-commerce facilities in

place, or planned. As brands’ determination to control their own online

distribution increases, Net-A-Porter could find premium stock and

exclusive editions harder to negotiate.

• Acquisition by the Richemont Group should enhance the site’s ability to

expand, but could lead to brands owned by rival groups withdrawing

their products, particularly once they have developed alternative

internet retailing capabilities. Long term, this could lead to a decline.

Net-A-Porter history

• Launched in 2000 by industry insider

Natalie Massanet; she sold her stake to

Richemont Group in 2010, in a deal

valuing the company at £350 million, but

remains as executive chairman.

• An upmarket, fashion magazine-style web

environment allied with luxurious box-

and-bow packaging as standard helped

the site improve e-commerce’s image.

• Discount sister-site theoutnet.com

launched in 2009, and menswear site

MrPorter.com in 2011.

Source: Trade publications, company information




43


1999 Tiffany

2000 Ralph Lauren

2001

2002 Hermès, Gucci

2003

2004

2005 Louis Vuitton, Dior

2006 Marni

2007 Boucheron, Armani,

De Beers, Rolex

2008 Emilio Pucci, Valentino,

Hugo Boss

2009

Kenzo, Roberto Cavalli,

Ferragamo, Donna Karan,

Dunhill, Balenciaga, D&G,

Fabergé, Fred, Jil Sander,

Versace, Loewe, Moschino

2010

Bulgari, Alberta Ferreti,

Cartier, Ermengildo Zegna,

Lacoste, Maison Martin

Margiela, Prada, Stella

McCartney, Marc Jacobs

• Despite some powerful luxury brands launching online stores relatively early, it

was during 2009 and 2010, that the internet retailing trend really hit the designer

clothing and footwear industry, with a slew of brands opening their first e-boutiques.

• This was partly an effect of the economic downturn, which interrupted normal

revenue cycles and make luxury brands eager to access a wider consumer base,

for example in second- and third-tier locations in both developed and emerging

markets, without devaluing the brand by allowing it to be stocked in lower-quality

retailers or bearing the expense of new stores.

• However, there were also other factors which demonstrated that full-price luxury

products could be sold successfully online, particularly the success of Net-A-

Porter and announcements such as Hermès’ confirmation that 5% of its sales

were generated through the internet. As more brands launched e-stores, more of

their competitors decided not to get left behind.

• Although e-boutiques are still very much a developed-market channel, with only a

few brands, for example Armani, moving into more challenging markets such as

China, online luxury retailing is expected to see long-term growth, as brands use

it to access new markets.

• In order to attract customers, particularly for full-price sales, brand image must be

carefully maintained, which fits well with the current trend of luxury brands taking

more direct control of their retail distribution and the vogue for high-profile

flagship stores.

• Lack of fact-to-face interaction may however make it more difficult for brands to

track and anticipate customer demand (and also conflicts with the current vogue

for “experiential” marketing); expect to see more brands exploring the potential of

social networking to build alternative relationships with consumers.

• There remain some notable exceptions: Chanel and Fendi still do not sell online,

though others, such as Tom Ford and Chloé, have taken the halfway step of

using their web pages to direct customers third party sites selling the brand.

E-commerce finally comes into fashion





44


• Gucci was a relatively early adopter of e-

commerce, launching its first transactional

website in 2002. However, in 2010, it raised the

importance of its online activity by branding its

newly-relaunched website as its “digital

flagship”.

• Online luxury is still largely a developed market

trend, making the digital flagship a sound

strategy for the Gucci brand, which derived

61% of its sales in Q4 2010 from North

America, Western Europe and Japan.

• The digital flagship strategy is also part of

Gucci owner PPR’s strategy of increasing its

control over distribution channels, including the

internet. By offering a high-performance, widely

available transactional website, Gucci’s reliance

on third party e-tailers is reduced.

• The third strand of the strategy is the digital

flagship’s relationship with Gucci’s other non-

store endeavours, such as social networking

and m-commerce.

Case study: Gucci raises the stakes with “digital flagship”


• In a flagship store, by definition, every aspect of a brand’s image

and execution should be as perfect as possible. Gucci’s strategy

for this online “flagship” has been to not only enhance the

shopping experience, but also to knit all the elements of the brand

image seamlessly together.

• The e-boutique is of a very high standard. Products benefit from

sharp images presented stylishly (handbags are ranged on virtual

shelves, while clothing is presented catwalk-style), and the full

breadth of Gucci’s range is available, from handbags to necklaces

to dog collars to baby-gros. Viewing any item offers visitors the

opportunity to “Love it”, share it with friends via Twitter, Facebook

or email, or consult with an online personal shopper.

• The geographic reach (US, Canada and 10 European countries) is

very extensive by luxury brand standards.

• Gucci is now one of the leading brands on Facebook with 3.8

million “likes”, has a healthy 45,000 followers on Twitter, and has

also developed applications for the iPhone/iPad.

• Gucci’s free iPhone app has now been downloaded over 800,000.

It was created to showcase the “World of Gucci”, but also ties in

with current campaigns: a recent update included a children’s

dress-up module to tie in with the brand’s recent launch of its

children’s collection. “Gucci Connect”, meanwhile, gave users

exclusive access to the 17 January 2011 Milan catwalk show.

• Moves such as this have made Gucci one of the most accessible

luxury brands online, but the strategy goes further. By launching

iPhone and iPad apps at a time when these items are still

somewhat above mass market, Gucci is targeting an ideal luxury

consumer group of higher-income, tech-savvy shoppers.




45


Format Key moment Progress Potential

Bloggers Coach was one of the

few luxury brands to tap

into the blogger

community, creating buzz

for the launch of Poppy.

The most successful blogs are

beginning to professionalise,

making them better vehicles

for brands, but many others are

failing to invest enough effort.

Bloggers interact with consumers on a

very personal level, making them a

tool that luxury brands should look at

using more as internet retailing cuts

into “face-time” with customers.

Facebook Burberry passes four

million “likes”, Gucci

close behind.

More brands are setting up on

Facebook, but not all are

investing enough in their

pages. A poorly designed site

creates a negative impression

for consumers.

The introduction of transactional sales

to Facebook is a major advance, but

brands need to make sure it accesses

their target demographic, and have a

coping strategy for when Facebook’s

popularity wanes.

Twitter @DKNY, tweets from an

unnamed PR girl at the

brand, has over 275,000

followers.

A few brands have established

Twitter followings (eg Bergdorf

Goodman and Oscar de la

Renta); absent brands (eg

Chanel) are at risk of copycats.

These successful Twitter accounts,

although quite personal in tone, are

also anonymous, making them easier

for a business to sustain long term.

Site profile outside the US still limited.

YouTube Chanel releases its

Scorsese-directed

Chanel Bleu commercial

on YouTube.

YouTube has provided a handy

platform for video content such

as commercials and catwalk

shows, but can lack the

personal touch.

Can be hard to control the other clips

that show up alongside a brand. As

more brands upgrade their websites to

include digital content, YouTube’s

popularity could fade.

Other SN

sites

Catchachoo campaign

(Jimmy Choo) - locating a

free pair of trainers using

FourSquare.com.

Hermès, LVMH and Burberry

have set up their own social

network-style sites, but initial

success is hard to sustain.

Enhancing Facebook pages, or using

another established site, seems a

more practical option for a brand than

creating a new social networking site.

Big potential in social networking - but approach with caution





46


• Online private shopping clubs, selling designer brands through limited time sales to registered members, are a

growing phenomenon. Maintaining the aura of exclusivity by requiring customers to be site members (often by

invitation only), and adding buzz and excitement by offering products for only a limited time such as 36-48 hours, this

format does much to replicate an existing element of the luxury business: sample sales.

• For luxury brands, these private member sites can act as a useful way in which to shift even quite large amounts of

surplus stock over a short time period, limiting the impact on the brand’s other distribution channels, on pricing levels

and on the brand’s image.

• Online members clubs remain largely geared towards designer clothing and footwear and luxury accessories,

though many sites are now branching out into categories such as homewares, jewellery and watches and even

holidays.

• In fact, this format would be suitable for most luxury categories, and the need to maintain a constant flow of top

brand sales in the face of increasing competition means that sites will continue to diversify. Other categories are also

seeing the arrival of their own, dedicated, private shopping clubs, such as SommelierCellar, launched in November

2010. The site offers wines selected by two of the UK’s top sommeliers, in sales lasting up to two weeks.

• The original private shopping club was vente-privee, which

launched in France in 2001. The vente-privee business model

has now been copied by many other sites in Europe and the US

including cocosa.com, Rue La La and Gilt Groupe.

• Although many of these sites are achieving rapid growth, there

are some signs that the model is under strain. Vente-privee still

relies on France for 82% of sales, despite four years of operation

in Germany and Spain and two years in the UK and Italy; since

2006, the number of items sold in each sale has fallen by 55%.

• A relaxation of vente-privee’s membership requirements - since

2010, new members can register without needing to be referred

by an existing member - indicates that slowing growth is a

concern.

Members’ online shopping clubs: Sample sales for all


0

20

40

60

0

500

1,000

2006 2007 2008 2009 2010 2011target

Sa

les

Vente-Privee: Sales and Productivity 2006-2011

Sales (€ million) Products sold (million)Number of sales ('00)Products sold per sale ('000)




47


• Discount sites offering truly high-end luxury brands

are few and far between.

• In the US, for example, although some of the discount

offshoots launched by premium department stores

now have their own transactional websites, the

selection of top brands is far outweighed by the sale

sections of the main brand. This may be because

there is less stigma attached to being a sale item at a

full-price store, than featuring on a more “end of line”

site.

• For a discount site offering a consistent selection of

top luxury brands, there are few that can compete

with theoutnet.com which, like its parent site Net-A-

Porter, is forging a path in luxury retailing that

conventional wisdom said was not possible.

• Although theoutnet.com offers international delivery

and styling advice, it has dropped some of the Net-A-

Porter extras, such as the magazine-style luxury

reportage. Instead, it creates buzz with a much more

immediate, impulse-driven approach, with time limited

“Pop up”, and “Going going gone” sales, and a

monthly giveaway of a top item, dear to the frugalista

fashionista’s heart.

• Thanks in part to its connection with Net-A-Porter,

theoutnet’s mix of top luxury brands and designer

collaborations is strong enough that presence on this

discount site does not devalue a brand; but it is not

easy to see how other sites could copy this model.

Can discount sites supply true luxury?


Oscar de la Renta on

Neimanmarcus.com’s sale pages

(36 items, biggest discount: 65%)


theoutnet.com (12 items,

biggest discount: 65%)


Neiman Marcus Last

Call, an outlet division

(3 items , biggest

discount: 55%)

Oscar de la Renta on the

website of high-end US

department store Neiman

Marcus (100+ items)




48


• China remains a major source of counterfeits, despite a number of government

initiatives to tackle the issue. Although a move by China’s eBay equivalent,

Taobao, which has recently launched a major crackdown and threatened to delist

sellers found offering fake goods, is a positive one, it will not solve the problem.

• As luxury brands attempt to widen their market coverage and make more use of

online sales, online sales of counterfeit goods will become a bigger and bigger

issue. Long term, the only real solution may be to change consumer perception

• For luxury brands, the biggest downside to the internet is how well the channel lends itself to selling counterfeit

goods. Counterfeits are frequently available online, where websites which often have authentic-sounding names such

as www.tiffany-discount.com, and through auction sites such as eBay in Europe and the US and China’s Taobao.cn.

• Louis Vuitton and Tiffany, both early adopters of internet retail, have led the way in aggressively pursuing auction

sites that host sales of counterfeit goods, particularly eBay, winning a number of court cases against the company in

the European courts. Charges included allowing sales by unauthorised sellers and allowing key word searches on

brands without their permission, as well as allowing sales of fake goods, and fines have mounted up into millions of

euros. However, success is not guaranteed: in November 2010, Tiffany finally lost a long-running case against eBay

when the US Supreme Court ruled that eBay was not responsible for trademark infringement by individual sellers,

and that it was enough if the site simple removed auctions of counterfeit goods.

• Trade bodies are also involved in fighting sales of counterfeit products: the Federation of Swiss Watchmakers has

been a vigorous opponent of online fraud, setting up a dedicated unit to combat the problem. In 2010, it negotiated

the cancellation of over 300,000 auctions of fake watches.

Faking it: Luxury fights back against online counterfeiters


of fake goods, making buyers more aware of what distinguishes a fake

product from the real thing, and making it less socially acceptable to flaunt

a “knock off” product.

• Sites such as www.replicaswisswatch.com, launched by the Federation of

Swiss Watchmakers in late 2010, are designed for precisely this purpose.

Visitors to the site can browse through a selection of watches for 30

seconds, but are then moved to a page with a strong anti-counterfeiting

message.




49


Introduction






Conclusion




50


Polo Ralph

Lauren

Corp: Can

premium

brands

continue to

co-exist with

outlet store

operations

as company

attempts to

move the

brand

upmarket in

Asia?

Polo Ralph Lauren: One brand’s approach to luxury distribution


Maintaining a luxury brand image and price

Using exclusivity to maintain price points and attract highest

income consumers

Restricting sales of the most premium labels to branded stores, not wholesale doors

Widening network of retail and ultra premium flagship stores

Generating sales in developed and emerging

markets

Widespread use of outlet stores to access aspirational

consumers

Expanding the customer base via wholesale doors across a

variety of positionings




51


Polo Ralph Lauren: Managing the brand


• The Polo/Ralph Lauren brands have been stretched to an incredible extent. Pricewise, they range from the super premium Ralph Lauren Purple Label collection (shirts from US$395) to the entry-level Rugby by Ralph Lauren brand (shirts from US$59.50).

• This strategy widens the customer base but could put the brands at risk of the overexposure which has so damaged the likes of Burberry and Gucci in the past. However, the PRL brands have the advantage of comparatively discreet branding, which should protect them from the worst excesses of overuse and counterfeiting.

• Just over half its revenues in 2010 were generated through wholesale sales, mainly via department stores, in North America, Europe and Japan. PRL’s biggest wholesale customer in 2010, accounting for 18% of the division’s sales, was the Macy’s department store, indicating that, in wholesale terms, PRL is positioned as an upper-mid-market, rather than premium, brand.

• PRL manufactures exclusive ranges for firmly mid-market chains such as Kohl’s and JC Penney, but it is noticeable that these lines - Chap’s and American Living, respectively - do not have an explicit connection to the core brand: Ralph by Ralph Lauren, sold at the more upmarket Dillard’s chain, is the only exclusive line to use the Lauren name.

• The company’s retail positioning is even more varied. Of the 350 standalone stores that PRL operates directly, nine are flagships and 170 are full-price stores, under the premium Ralph Lauren and upmarket Club Monaco banners, but 171 are outlets, selling heavily discounted overstock and past-season products.

• Despite the company’s statement that “our full-price retail stores reinforce the luxury image and distinct sensibility of our brands”, during fiscal 2010, the number of full-price stores in PRL’s key US market was reduced, while the number of outlets was increased.

Ralph Lauren

brand variants Other brands

Premium retail formats

Outlet stores

Purple Label

Club Monaco

Rugby

Chaps

American Living

Ralph by Ralph Lauren

Ralph Lauren Women

Black Label

Polo Ralph Lauren

Lauren for Men

Blue Label (women)

Pink Pony RRL

RLX

Polo Jeans Co

Lauren by Ralph Lauren

Various brands, especially Lauren

by Ralph Lauren, Polo

Sold only via PRL retail stores

Sold through wholesale formats




52


• PRL’s current focus is on expanding its retail activities, even though they are apparently less profitable than its

wholesaling division, which contributed over half the company’s sales in fiscal 2010 and nearly two thirds of operating

income. This may make the shift towards retail appear counter-intuitive, but the company is bargaining on it being the

key to long-term growth.

• Because PRL’s wholesale revenues are wholly dependent on developed markets, and heavily reliant on the

beleaguered department stores channel, not only were wholesale revenues hard hit by the economic crisis, falling by

8% (US$217 million) in fiscal 2010, and slower to recover than the retail side in the first 9 months of fiscal 2011, but

the division is also badly positioned to tap into the strong growth forecast for emerging markets to 2015 and beyond.

• The other region with a significant PRL presence is Asia Pacific. Until 2008, PRL relied mainly on licensed partners to

run its Asian stores. However, brand development in the region became increasingly out of step with the global

Lauren image, and the company has now bought back the licences in order to operate stores in the region directly

and rebuild brand equity. If successful, PRL will get the full benefit of rising sales in this dynamic market.

• However, although this move will boost sales income, heavy investment in both store refurbishment and relocation

will be needed if PRL is to move the Lauren brand’s positioning upmarket, which will have an impact on the division’s

profit levels into the short to medium term. Expanding store networks, store refurbishments and flagship launches are

other ongoing expenses that the company will have to bear long term in order to support its retail activities.

Retail investments target repositioning for long-term profit…


Licensing, 4%

Wholesale, 51%

Retail , 46%

Polo Ralph Lauren: Revenue Breakdown Fiscal 2010

Source: Company reports

Retail, 27%

Polo Ralph Lauren: Operating Income Breakdown Fiscal 2010

Wholesale,

62% Licensing,

11%

Source: Company reports




53


• If PRL’s shift towards retail is to pay dividends, wooing the Asian consumer will be crucial. Regaining the licences for

its Asia Pacific stores was a first step, but now the company has to energise a store portfolio positioned some way

below the premium luxury image that PRL wants.

• The company’s licensing strategy in Asia Pacific, which began several decades ago, failed to keep pace with the

changing demands of the Asian consumer base. Well known as a luxury brand in the rest of the world, in Japan and

other Asian markets, it had historically held a much more mid-market positioning centred around the Blue Label

men’s sportswear ranges. This has hindered its ability to tap into the exploding demand for luxury products within the

Asian markets, and also from Asian tourists travelling to other markets.

• Asia’s contribution to PRL’s global sales is limited - less than 10% in 2010 - but now that the company has regained

control of the 44 stores and 503 concessions in the region, it is hoping to grow sales in an attempt to offset difficult

market environments in North America and Europe.

• As well as improving the retail distribution, building customer awareness of Polo Ralph Lauren as a premium brand is

a cornerstone of the company’s strategy. So far, PRL has experienced some positive progress, claiming to have

seen a strong customer response to stores given a luxury makeover.

...but strategy’s success depends on making progress in Asia


0

0.5

1

1.5

2

2.5

3

3.5

4

North America Europe Asia

Sa

les (

US

$ b

illio

n)

Polo Ralph Lauren: Sales by Region 2009-2010

2009

2010

Source: company reports

• However, development of the existing store and concession

portfolio was geared towards the lower positioning, leaving

PRL to deal with a legacy of stores and locations do not fit a

more premium image.

• As China, in particular, begins to consume luxury goods

voraciously, this is the ideal time to move a brand upmarket.

President and COO of PRL, Roger Farah, has called this “a

once in a lifetime opportunity to custom build this region, in a

manner that is aligned with our global luxury image....

expected to transform the company in the long term.”

• Nevertheless, as the brand tries to push upmarket in Asia,

and Asian consumers become more aware of a brand’s

positioning elsewhere, there is a risk that the luxury message

PRL is trying to communicate will become confused.




54


Supporting Asian brand positioning: A key role for flagships


Denotes PRL flagship: New York (3), Chicago,

London, Paris, Milan, Moscow, Tokyo

• “We’ve noticed the extraordinary impact the Chinese customer has had on other parts of the world as they travel.” Roger Farah, President and COO of PRL

• With the exception of the Moscow store, all PRL’s flagships are in developed markets, but consumers from emerging markets, particularly China, are a key customer group.

• Raising the profile of the PRL accessories range, as trialled in the latest flagship, a revamped double outlet on New York’s prestigious Madison Square Avenue, offers more entry-level products to attract new consumers to the brand.

• Sales at the latest flagship exceeded the company’s expectations, mainly owing to strong demand for high-end items, but revenue generation is a secondary concern.

• Positive reports of the stores by overseas visitors when they return home will provide vital support to the Polo Ralph Lauren brands’ move to a more luxury image in Asia...

• ...which should then boost sales to visiting Asian consumers in Europe and the US.

PRL retail presence

Newly acquired national retail licences




55


Can outlet presence co-exist with Asia Pacific ambitions?


Support luxurious, exclusive, premium

image

Brand flagships in New York and elsewhere and high-profile marketing

events enhance the Polo Ralph Lauren premium

positioning, even among emerging market

consumers

Long-term plan: Reposition Polo Ralph Lauren as a truly luxury brand in Asia;

build network of owned stores and online in the region, as upmarket wholesale

doors are limited; profit from fast growth forecast for the region

“The more we elevate our stores and merchandise mix, the stronger the customer response.” Roger Farah,

President and COO of PRL

Outlets now account for half of PRL’s retail stores. Not only are Polo Ralph Lauren

products available at steep discounts, but past-season clothing can even be found for sale at outlet stores, diluting exclusivity still

further.

PRL brands available at outlets are mainly mid-market variants; but do consumers

make the distinction?

Outlets in the US, Europe and Japan are as accessible to emerging market visitors

as PRL’s flagship and premium locations; and

organic growth of the outlet network is faster. Is the effect

of the premium stores being nullified by

the outlets?

Confuse and dilute

premium image




56


Navigating the market to drive growth and support the brand


Successful

repositioning in

Asia will offer

PRL a bright

future as a top

luxury brand

Investing

in Asian

retail

network

Improving

the luxury

positioning

of the PRL

brands

Tapping

into high-

growth

emerging

markets

Growing

sales

turnover

Maintaining

growth in

developed

regions

Luxury

flagships

support

premium

brand

positioning Operating

across a

wide price

spectrum

Tapping into

the lower-

income

aspirational

market

Overexposure

in non-luxury

environments

risks devaluing

premium brand

portfolio (the

“Burberry effect”)

PRL branding

is relatively

discreet; will

this protect the

portfolio from

overexposure?

Increasing

profit

margins

Keeping

control of

operating

costs

Outlet

stores =

lower

operating

costs

Wholesale

distribution

leans towards

a mid-market

positioning

Wholesale

distribution =

expansion

with

minimum

outlay

As a listed

company, fulfilling

shareholder

expectations is a key

task for PRL.

Expansion should

ensure strong ongoing

growth; but the risk of

brand overexposure

should not be under-

estimated




57


Can PRL’s premium/mass strategy ensure long-term success?


7.3

9.6

27.6

86.5

126.6

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Polo Ralph Lauren Corp: Profit Margin vs Share Price, Fiscal 2002-2011

Net profit margin fiscal 2002-2010 (%)

Share price fiscal 2002-2010 (US$)

Share price fiscal 2011 (US$)

• Of all the factors that influence share price, the market has proven itself most sensitive to fluctuations in profit

margin over recent years; even a 1% decline in sales during the year to March 2010 failed to dampen share

price growth in the face of rising margins.

• Strong sales growth for the first three quarters of fiscal 2011 together with the completion of the company’s

strategy to assume responsibility for its Asian operations have seen the share price climb still further.

• As a publicly-listed company the company has to balance near-term pressure of shareholder returns, while

taking the long-term view of maintaining brand value.

• Repositioning itself as a more luxury brand in Asia while simultaneously operating an extensive mid-market

and outlet portfolio in developed regions is an extremely delicate balance, particularly at a time when even

emerging market consumers are increasingly globally aware, and often personally travelling, and shopping,

outside their home market.

• For now, PRL’s efforts look to be succeeding on the back of extensive investment in its luxury store portfolio,

but while its lower-end operations continue to offer immediate and obvious rewards, the company will

continue to be pulled in two different directions. The company’s long-term success depends on its ability to

juggle those competing pressures.




58


Introduction






Conclusion




59


Retail reaction:

• Deep discounting becomes the norm, particularly affecting revenues from wholesale distribution channels.

• Wholesale order levels fall.

Retail reaction:

• Control becomes a priority for luxury brands, partly to maintain price points and partly to support brand image/heritage. Stronger emphasis on owned stores is common.

• Wholesale revenues begin to recover, but brands are wary of relying on them.

Retail reaction:

• In order to reach a larger market, some brands relax their control on distribution; reliance on wholesaling grows.

Recession

• Aspirational luxury buyers disappear; sales drop across the price spectrum as even some high-income buyers pause to assess the damage.

Recovery

• Premium luxury recovers, though buyers look for value-holding “classic”’ pieces; brand image often supported by marketing which emphasises heritage and quality.

Boom

• Sales growth targets become more ambitious; luxury brands widen geographic and consumer bases in search for extra sales.

• Brands begin catering for a resurgent aspirational consumer base.

Conclusion: Luxury cycle and its retail consequences

Conclusion




60


Conclusion: Balancing act required from luxury brands

Conclusion

Brand-controlled retail Wholesale

Premium

retail

environments

Outlet

formats

• Wider distribution

• Caters to aspirational buyers

• Formats such as limited-time sales solve

overstock issues but limit brand damage

• Loss of exclusivity

• Negative impact on main line pricing

• Harder to identify sellers offering

unauthorised or counterfeit goods

• Caters to aspirational buyers

• Lower-price branded alternative to

counterfeit goods

• Lower operational costs

• Major loss of exclusivity

• Potential for branded outlet stores to

damage brand equity

• Significant negative impact on

main line pricing

• Widens distribution without

store overheads

• Can open up brand to different

customer base

• Can be used to adjust brand positioning

• Some loss of exclusivity

• Loss of control over pricing

• Potential for third party retail standards to

slip

• Enhances selective/

exclusive brand attributes

• Supports brand image across

owned and wholesale environments

• Direct customer contact helps to

communicate brand values

• Difficult to recreate luxury environment online

• Narrower presence

• Higher operational costs

• Harder to attract new consumers to brand




61


Category Key markets High growth distribution

Designer clothing and

footwear

US, Japan,

Italy

E-commerce, m-commerce and

directly-operated stores

Fine wines/

Champagne and spirits

UK, Japan, US Wine specialists, online, home-

shopping, department stores

Luxury accessories US, Japan,

Italy

Department stores, flagships,

owned stores, internet, opticians

Luxury electronic

gadgets

China, Brazil,

Turkey

Owned stores/flagships,

department stores, jewellers,

duty-free, hotels, online

Luxury fine china and

crystal ware

China, France,

Saudi Arabia

Department stores

Luxury jewellery and

timepieces

US, India,

France

Jewellers/specialists,

department stores, owned stores

Luxury tobacco US, Germany,

China

Other venues (eg clubs,

societies), online

Luxury travel goods US, Japan,

China

Owned stores, department

stores, duty-free, hotels, online

Luxury writing

instruments and

stationery

US, Japan,

China


stores, specialists, online

Super premium beauty

and personal care

China, US, UK Department stores, owned

stores, duty-free, online

Conclusion: Luxury’s evolving approach to distribution

Conclusion

By 2015, Brazil will have replaced

Japan as the second largest market

for this category. Few of the biggest

brands have stores in the region, so

expansion will be required in order to

tap into market potential.

India is forecast to be this channel’s

second largest market by 2015. The

presence of luxury department stores

in this market is limited, so brands

should consider widening their DOS

network, and exploring locations that

high-income customers are likely to

pass through, such as airports and

hotels.

Luxury tobacco has been slow to

explore online potential, but trends

such as cigars for female smokers

point to a category that is beginning

to modernise. Could a move to e-

commerce be next?

This category is set to remain

dominated by developed markets,

but China and India are both

showing major growth; brands need

to nurture customer interest in these

markets.




62


Whole

sale

• Relationships between luxury brands and their wholesale distributors have suffered damage over the past 2-3 years, but as sales recover, a level of trust will return.

• In the medium term at least, luxury brands seem set to be more cautious about the wholesale doors they will sell through. There will be a stronger focus on store standards at third party retailers, and inventory control.

• Long term, as memories of the recession fade, and brands focus more on international expansion and aspirational sales, wholesale growth will rise.

Reta

il

• The popularity of directly-operated stores is likely to continue, as brands begin to take back control of franchised operations and expand their own store networks.

• Many brands have learnt to value the control that operating their own stores offers, particularly in emerging markets.

• The internet allows brands to distribute on a global basis; this is an area set to expand over 2010-2015.

• Brands that rely too heavily on directly-operated stores may find it restricts their international expansion; wholesale distribution will still have a part to play.

Inte

rne

t R

eta

il

• Over 2010-2015, more luxury brands will become proactive in their approach to non-store activities.

• Key strategies:

• Creating transactional websites so that customers all over the world can buy products directly from a brand, minimising the risk of counterfeits;

• Using brand websites to showcase products, and social networking sites to connect with consumers;

• Social networking strategies will need to be flexible enough to work across different sites in order to target the right consumer bases in the right environments.

Potential to 2015: Routes to market for luxury goods

Conclusion

Strong growth Healthy growth Significant growth





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• As brands become more globalised,

their need to spread the message of

their luxury positioning more widely

will raise competition for shelf space

at influential third party retailers,

from fashionable boutiques to ultra

premium department stores.

• A more bespoke approach from

brands towards these retailers is

expected, featuring exclusive

ranges, limited-time offers and

brand collaborations aimed at a

specific store.

Wholesale

• The tide is already turning in terms

of luxury brands launching their own

transactional websites, but care

must be taken that the increase in

remote sales does not leave brands

out of touch with their consumers.

• Expect a greater emphasis on

interaction, even if it is not face to

face: live one-to-one styling advice,

product customisation options,

lifestyle-related add-ons.

Online

• The internet, particularly short-term,

exclusive offers, could result in

brands who currently use outlets

purely to get rid of surplus stock

exiting the brick and mortar outlet

format completely. Losing those few,

harder-to-find stores could devalue

the outlet mall concept as a whole,

with a detrimental effect on brands

that are heavily exposed to this

market.

• Expect brands to start making a

clearer distinction between their

outlet activities and their higher-end

collections.

Retail

2015 and beyond: Key strategies going forward

Conclusion




64


DOS: Directly-operated stores, ie stores under the direct control of the brand owner, rather than a licensee or

franchise operator.

HNWI: “High Net Worth Individual”; definitions vary, but generally refers to a person with US$1 million or more

of investable assets.

Definitions

Definitions of the Report



luxury market.pdf

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