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Shock of the New ChicDEALING WITH NEW COMPLEXITY IN THE BUSINESS OF LUXURY

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January 2014 | The Boston Consulting Group

SHOCK OF THE NEW CHIC

DEALING WITH NEW COMPLEXITY IN THE BUSINESS OF LUXURY

OLIVIER ABTAN

ANTONIO ACHILLE

JEAN-MARC BELLAÏCHE

YOULLEE KIM

VINCENT LUI

AMITABH MALL

ANTONELLA MEI-POCHTLER

SARAH WILLERSDORF

2 | Shock of the New Chic

CONTENTS

3 EXECUTIVE SUMMARY

6 A KINETIC INDUSTRY CALLS FOR FOUR AREAS OF CHANGE

8 NEWCUSTOMERS—ANDTHENEWWAYSTHEYBUYThe Shift Toward Luxury ExperienceThe Push for More Detailed Segmentation and Customization

14 NEW GEOGRAPHIES: NOT THE COUNTRY MARKETS YOU THOUGHT YOU KNEW

A New Index of Luxury BuyingInsights to Help Brands Succeed as Demand Patterns Shift Worldwide

22 NEWBUSINESSMODELS:WHYALTERNATIVE APPROACHES NOW MATTER SO MUCH

Reinforcing Partnerships and Sharing with RetailersReframing the Value of Licensing and Joint VenturesLeveraging Vertical Ecosystems

24 THE PERSISTENT RISE OF DIGITALThe Importance of E-commerce and Omnichannel MasteryRevisiting Channel Roles and Sorting Out New Channel ConflictsBenefiting From the Rise of “Social” Marketing

28 TEN TOP AGENDA ITEMS FOR LUXURY EXECUTIVES

30 FOR FURTHER READING

31 NOTE TO THE READER

The Boston Consulting Group | 3

EXECUTIVE SUMMARY

Although global markets for luxury goods and services are not racing ahead at the pace seen in recent years, they will continue to

grow at around 7 percent a year, handily outpacing GDP in many econo-mies around the world. And the luxury business continues to be kinetic; it’s the scene of enthusiastic start-up activity and bold acquisitions in several sectors.

Yet luxury providers still risk being half a step behind the markets they are meant to serve. They must do more to adapt to new levels of complexity. They face new types of consumers who engage in new kinds of purchasing behaviors. They must extend their reach into new geographies and cities—and must do so in new ways. They are obliged to explore and evaluate in-novative business models that may be alien to the approaches that have served them so well for so long. And there is much more they can do to ride the revolution in digital technology.

The global appetite for luxury is not sated—but shoppers are changing it in dramatic ways.

• Consumers’ ongoing urge to splurge is evident in the latest study byTheBostonConsultingGroup,whichrevealsthatconsumersspent an annual aggregate amount of more than $1.8 trillion worldwideonitemstherespondentsdefinedasluxuries.Thatfigurefaroutstripstheapproximately$390billiongloballythatisusuallycitedastotalannualsalesofluxurygoodssuchasapparel,cosmetics,watches,andjewelry.

• Thebusinessofluxuryexperiences—fromprivateairlineservicestofive-starrestaurants—isgrowingveryrapidly,andisalreadyworthalmost$1trillionofthe$1.8trilliontotal.

• Thisrapidshiftfromowningaluxurytoexperiencingaluxury—alongwithotherequallydramaticshiftsindemographics,econom-ics,technology,andconsumers’attitudesandbehaviors—makeit


imperativethatbrandsundertakemoredetailedsegmentationofcustomersandcustomizationofproducts.Twentyyearsago,luxuryconsumerswerelesssophisticatedandmorehomogenous.Today,theyareeducatedaboutbrands,moredemanding,andmorelikelytoshopacrossmultiplechannels.Rigorousconsumerresearchcanyieldfreshinsightsaboutmarketsegmentationandgo-to-marketapproaches.

Global demand is shifting, but the story isn’t just about emerging markets. While the BRIC countries (Brazil, Russia, India, China) and beyond offer real opportunities, not every city in every one of the developing countries holds the same promise. Also, parts of many developed-economy markets continue to be very lucra-tive places to sell luxury items. These realities make cities—rath-er than countries—the best lens through which to view consumer attitudes and demand.

• LuxurybuyersinShanghaiandBeijinghavemoreincommonwiththeircounterpartsinParisandTokyothantheydowiththoseinZhenjiangandPanjin.Forthisreason,brandsmustdeeplyunder-standthedemographicandsociographicfundamentalsincitiesratherthan,forinstance,allowingconsumerresearchconductedinacapitalcitytorepresentbuyingbehaviorsacrossanentirecountry.

• Brandscanbenefitfromcity-levelanalyticsnotonlytobettertargetindividualcitiesbutalsotoenablethemtoclustersimilarcitiestogether—andtothendevelopsophisticated,localizedgo-to-marketstrategiesthatbetterservelocalcustomersandtourists.

• Tohelpluxurybrandsaddresstheseissuesandanswersuchquestionsaswheretheyshouldoptimizeexistingretailfootprintsratherthanopeningnewstores,BCGhasdevelopedtheBCGMetroluxeIndices.Thethreeindicesmeasuretheluxurystatusandgrowthpotentialoftheworld’s550richestcities(definedbyGDPpercapita).

Brands must now recognize that their future growth relies heavi-ly on success with new technologies and in new market catego-ries, cities, and channels—aspects they know they cannot master alone. Consequently, they must pursue new business models that help them forge links to other entities and weave themselves into self-sustaining networks.

• Brandscanreinforcepartnershipswithretailers.Theavailabilityofbigdataandtoolsforcustomerrelationshipmanagement(CRM)meansthatmoreinformationaboutcustomersisaccessible.Brandsandretailersmustthereforerethinkthebenefitsofcollabo-ratingtodrivetop-linegrowth.

• Brandsshouldreframethevalueoflicensesandjointventures.Althoughsomeluxuryhouseshavebegunbuyingbacklicensestobettercontroltheirbrands,itmaybebettertoenrichpartnerships


thantocancelthem.Jointventurescanappropriatelyalignbothparties’ interests.

• Luxurybrandsneedtobuildverticalecosystems.Someplayershavestartedtotakeequitystakesin—oracquire—suppliercompanies.Theirobjectivesvaryfromretainingrareknow-howandaccesstoscarcematerialstocreatingcompetitiveadvantage.

For luxury brands as for every other type of business, the digital domain is here to stay. But it’s a domain where companies are still feeling their way. This leaves an enormous opportunity for the luxury brands that are quickest to distinguish what works from what doesn’t.

• Brandsmustexceline-commerce.Todoso,theyhavetograspthe“3Cs”: commerce, content, and community.Theymustalsofocusondeployingomnichannelstrategiesandonintegratinge-commerceandofflineretail.BCG’sresearchsuggeststhatomnichannelconsumersspendtwicetheamountthatconsumerswhopurchaseonlythroughofflineoronlythroughonlinechannelsdo.

• Brandshavetorethinkchannelrolesandresolvenewchannelconflictsbecauseinmanyluxurycategories,consumersexperiencebrandsthroughmultiplechannels.It’snecessarytoredefineeachchannel’scontributiontobrandbuilding,salesvolume,andprofit.

• Theluxurysectorhasyettomastersocialmediaasavaluablewayofincreasingcustomerengagement,developingnewmarkets,andencouragingandenablingbuyerstobebrandadvocates.


A KINETIC INDUSTRY CALLS FOR FOUR AREAS OF CHANGE

Consumersremainsmittenbyluxury.Theirurgetosplurgewasrevealedina

2013studybyTheBostonConsultingGroup,whichfoundthatconsumersspentanannualaggregate amount of more than $1.8 trillion worldwideonitemstherespondentsdefinedasluxuries.1 (SeeExhibit1.)

Thatfigurefaroutstripstheapproximately$390billiongloballythatisusuallycitedastotalannualsalesofluxurygoodssuchasapparel,cosmetics,watches,andjewelry.Ofthe$1.8trillioninannualluxuryspendingBCGhasidentified,salesofluxurycarsac-countformorethan$400billionworldwide,andthebusinessofluxuryexperiences—fromprivateairlineservicestofive-starrestaurants—isalreadyworthalmost$1tril-lion of the total.

Experiential luxury continues to surge in emerging as well as mature markets.

Inthiscontext,theluxurymarketcontinuestobucktheslow-andno-growthtrendstypicalofmanyotherindustrysectors. BCGforecaststhatafterthepasttwoyearsof11percentannualgrowth,thepersonal-luxury-goodssectorwillexpandannuallyat

around7percentoverthenextfewyears,outrunningtheincreasesinGDPseeninmosteconomies.

Butwhatthoserawstatisticsdon’tshowishowkinetictheluxuryindustryreallyis.Westillseelaunchesoflustrousnewbrands,boldacquisitions,equitystakespurchasedbypri-vate-equityfirms,andevenstart-upactivity.Recently,LVMHMoëtHennessyLouisVuit-tonspent$2.6billiontobuycashmerecloth-ierLoroPianaandthenacquiredNicholasKirkwood,J.W.Anderson,andHotelSaint-BarthIsledeFrance.2

Manyoftheshiftsinconsumerbehaviorhighlighted in our 2010 and 2012 reports on thegloballuxurymarketcontinuetopropelthesectorinmorechallengingdirections—andinmorecomplexways.(Formoreaboutthe trends see Luxe Redux: Raising the Bar for the Selling of Luxuries,BCGFocus,June2012;and The New World of Luxury,BCGFocus,December2010.)Emerging-marketbuyersarebecomingprominent:together,Chinese,Brazilians,Russians,andIndiansaccountformorethan30percentofluxuryconsumptionworldwide.Furthermore,experientialluxurycontinuestosurgeinemergingaswellasmaturemarkets;inChina,forexample,annualgrowthinluxuryexperiencestops 15percent,highlightingboththreatsandopportunitiesfortraditionalluxuryplayersaccustomedtosellingproductthere.


Brandsmustmatchsuchcomplicatedchang-eswithappropriateresponses.BCGobservesthatsuccessinluxuryislinkedincreasinglytoabrand’smasteryinfourareasofchange:

• Newconsumers,differentsegments,andbuying behaviors that are not easy to decode

• Aneedtounderstandnewgeographiesandthenewspecificsofcitiesasuniquemarkets

• Newandinnovativebusinessmodels,requiringopennessandculturalchanges

• Disruptionsinmarketingandsellingenabledbynewdigitaltechnologies

This report elaborates on those four dimen-sionsofchange,identifyingwheretheleader-shipteamsatluxuryprovidersmustplacemost of their energy and efforts in the future.

Notes1.Toconductthestudy,BCGpartneredwithresearchfirmIpsos,pollingroughly1,000affluentindividualsineightdevelopednations(Germany,France,Italy,Japan,SouthKorea,Spain,theU.K.,andtheU.S.)andfouremergingcountries(Brazil,Russia,India,andChina).2.“LVMHtoBuyControlofLoroPianafor$2.6Billion,”New York Times,July8,2013.

60(80)

65(90)

120(165)

40(55)

320(440)

70(95)

50(70)

150(205)

60(80)

335(460)

50(70)

0

300

600

900

1,200

1,500

Total

1,300(1,800)1

Travel andhotels

Alcoholand food

Technology

Homeand

furnitureArts

Luxurycars

Cosmetics

Watchesand

jewelryLeather

goods andaccessories

Apparel Other(e.g., spas,yachting)

Estimated 2012 market size, sales in €billions(amounts in parentheses are in $billions)

“Experiential luxury”~€715 billion ($980 billion)

Personal luxury goods~€285 billion($390 billion)

Luxury cars~€320 billion($440 billion)

10 11 8 13 9 11 25 12 11

11%

1313 11

14%

CAGR,2010–2012 (%)

Source: BCG-Ipsos market research.Note: This measure of luxury reflects the consumer perspective; for example, the watch and jewelry sales are larger than many traditional estimates because consumers include both branded and nonbranded products.1The final totals are rounded.

Exhibit 1 | The Luxury Market, as Defined by Consumers, Is Valued at $1.8 Trillion Worldwide


NEW CUSTOMERS—AND THE NEW WAYS THEY BUY

Recently,awealthyChineseindividual spent$1.5milliononaluxurytravel

packagethatwilltakehimtonearly1,000UNESCO World Heritage sites during a two-yeartrip.Meanwhile,hisson,whohadjustboughthissecondPiagetwatch,signeduptodivewithhammerheadsharks.1

Thesestoriesaboutthetwomenandtwoverydeluxeexperiencesdrivehometwocriti-calpointsaboutthechangingfaceofluxury.First,thekindofluxuryexperiences,custom-izedtotheirindividualneedsandinterests,thatbothmenareplanningtoenjoyarebe-comingincreasinglycommon—andmoreandmore of them are arising in the emerging world,fromplacessuchasChengdu,Jakarta,andSantiago.Second,whilethesonstillbuysplentyofluxurygoods,thefathersayshenowfavorsexperiencesovernew“things.”Thedifferentattitudessignaltheimportanceofidentifyingandservingmoredetailedcus-tomersegmentsthanhasbeentypicaloftra-ditionalmarket-scopingefforts.Bothpointsdeservecloserscrutiny.

The Shift Toward Luxury ExperienceWorldwide,luxuryisshiftingrapidlyfrom“having”to“being”—thatis,consumersaremovingfromowningaluxuryproducttoex-periencingaluxury.BCGflaggedthistrendinits2012Focusreport, Luxe Redux: Raising the

Bar for the Selling of Luxuries.Experientiallux-ury,suchasexoticholidays,gourmetmeals,andartauctions,nowaccountsfor55percentofgloballuxuryspending.Salesofexperienc-esalsooutpaceproductsales:BCG’sresearchhasfoundannualgrowthinthecategoryrun-ningat14percentcomparedwith11percentforsalesofpersonalluxuryproductssuchaswatches,jewelry,andhandbags.

Withinexperientialluxury,growthlevelsofindividualsectorshavevaried,withthetech-nologysectorachievingthehighestcom-poundannualgrowthrate:25percent.Thisisnot altogether surprising given the nearly universalstrengthoftechnologybrandsto-day.InBCG’s2013ConsumerSentimentsur-vey,affluentconsumerspraisedAppleasthe“mostaspirationalbrand”inCanada,France,Germany,Italy,Spain,theU.K.,andtheU.S.Sonywasinthetop10insixofthesesevencountries;Samsungmadethelistinfiveofthem.YetChanel,Dior,Gucci,andLouisVuit-tonrankedinthetop10inonlyafewofthecountries.(SeeExhibit2.)

ConsumersinemergingmarketssuchasChi-naandIndiaarealsorapidlyshiftingtohigh-endexperiences,althoughspendingonsuchexperiencesstillrepresentsasmallportionoftotalluxuryexpenditures.BCG’s2013GlobalConsumer Sentiment Survey revealed that 29percentofconsumersinChinapreferen-richingexperiencesoverproducts,versus


51percentofconsumersintheU.S.(Formoreabout the Global Consumer Sentiment Sur-vey,seeThe Resilient Consumer: Where to Find Growth amid the Gloom in Developed Economies,BCGFocus,October2013.)

Thisreflectsanaturalpurchasingtrajectory:newlyaffluentbuyerstendtoamasstangiblegoodsthatshowofftheirwealth.“ThenewIndianluxuryconsumerispursuingalifestylewhereowningexclusiveitemsandowningthemfirstisaclearsignofwealthandpow-er,”aseniorexecutiveforLamborghinitoldReuters.2Thosewhohaveacquiredthe“things”theywanttendtomoveontoone-of-a-kindexperiencesthattheycansharewithothers.

Inadditiontothismaturationinthecon-sumptioncycle,themovefrom“having”to“being”isdrivenbydemographicfactors.Babyboomers,nowintoretirement,arelead-ingtheway.Asthefirstrealpurchasersof“democraticluxury,”thesesixtysomethingsandseventysomethingsalreadyownthewatchesandcarstheywant,sotheyseeken-joyableandoftennovelexperiencesonwhichthey are prepared to spend handsomely. Fall-

ing in line behind them is the Millennial gen-eration—thoseintheirtwentieswhoaregeared to pleasure rather than possessions. Totheseyoungpeople,owningsomethingusuallycomessecondtosharingnewideasandnewexperiences.3

Luxurycompaniesmustembracethesekeytrendsinthefollowingthreeways.

Enter the true luxury-experience categories. Luxuryexperiencesarenolongerlimitedtospecialoccasions—thehigh-endrestaurant,thedeluxespa,theyachtingvacation,theprivatesafariinBotswana.Nowtheyareexpandingtotouchmoreofaconsumer’severydayactivities.

Considerthebrandingandexpansionofser-vicesrangingfromsuperiordiningtocosmet-icsurgeryandexerciseclasses.Suchserviceshaveseveralcharacteristicsincommon.First,theyconsistentlyenjoydemandthatoutstripssupply;waitinglistsarelong,andtheliststhemselves further spur the brands’ desirabil-ity.Second,theservices’pricingisfarnorthofwhatischargedforfunctionalversionsofthesameoffering.Third,these“experience”

Number of seven selected countries in whichconsumers ranked a brand as a Top 10 aspirational brand

Dior

GiorgioArmani

Gucci

TommyHilfiger

Nike

LouisVuitton

Coach

PradaAstonMartin

Lexus

Chanel

Jaguar

Volkswagen

Ferrari

Porsche

Audi

Mercedes

BMW

Samsung

Sony

Apple0

2

4

6

Technology Automobile Apparel and accessories

Source: BCG Global Consumer Sentiment Survey, 2013.Note: The selected countries are Canada, France, Germany, Italy, Spain, the U.K., and the U.S. The consumers were asked, “Across any and all categories, what brands do you most aspire to own or wish that you could afford to own more of than you already do?”

Exhibit 2 | Many Auto and Technology Brands Are Top Aspirational Brands Among Select Consumers


brandsregularlyhaveacelebrityfollowing.Forexample,MickJaggersometimesdinesatNewYorkCity’sCaféBoulud;actressKatieHolmestakesindoorcyclingclassesatSoul-Cycle.Fourth,makersofluxuryproductsglad-lytietheirofferingstotheexperiencebrands.Forinstance,cosmeticsbrandClarinscollabo-ratedonasummerofferwithBarry’sBoot-camp,ahigh-endU.S.fitnessstudio.

SoulCycleisanexcellentexampleofan“ex-perience”brandthatisreachingtheevery-day.Foundedin2006,SoulCycleoffershigh-energyindoor-cyclingclassesdesignedtohelppeopleenjoyworkingout;theinstruc-torsthemselveshavestarbilling.Pricedat$30to$40aclass,SoulCycle’sactivitiescomeintiersofservice.4 The SuperSoul series of-fers50classesfor$3,500(whichcomestomorethantwicetheregularpriceofasingleclass),andthepackagecomeswithearlyreg-istrationandpriorityplacementonwaitinglists.SoulCycleusesplentyofsocial-mediamarketing,withtheinstructorstweetingandusingFacebooktoenergizecustomers—andofcoursetospurdemandfortheirclasses.Thecompanyalsosellsplenty:itoffersitsownbrandedattireandhasstrategictiestoestablishedluxury-goodsfirms.

Turning sales activities into deluxe experiences is reach-ing new levels of excellence across a widening range of luxury segments and across all channels.

Similarly,anumberofhigh-endmetropolitanhotelsareexpandingtheirofferingsbeyondmerehotelroomstofeaturedexperiences.Forinstance,someorganizeexclusiveeventssuchasfashionshows,artgallerytours,orwinetastingsthathelptheirguestsenjoythecity.Furthermore,someluxuryautomakers,notingthattheirexoticvehiclesoftensitingaragesorarequicklyresoldafterpurchase,arestrivingtoenhancetheexperienceofowningtheirvehiclesbyofferingselective

membershipswithperkstokeepownersbe-hindthewheelandtalkingabouttheircars.

Enrich the selling process. Turning sales activitiesintodeluxeexperiencesintheirownrightisnothingnew.Butthepracticeisreachingnewlevelsofexcellenceacrossawideningrangeofluxurysegments—fromautomobilestofashion—andacrossallchannels.Theintentisclear:tohelpconsum-ersbetterconnectwithandexperienceabrand.

Customizationisone“sellingexperience”technique.Aftercustomizingadesiredmodelonline,aBentleybuyercantrackthemanu-factureanddistributionofhisorhercarinrealtime.Atleastonemakerofexoticcarsinvitesitspurchaserstoitsmanufacturingfa-cilitiestoparticipateintheexperienceofbuildingthevehicle.

Burberryprovidesanevenmoresophisticat-edexperiencethatspansseveralsalesandmarketingchannels:itsRunwayMadetoOr-dercustomizationservice.Justafteritsau-tumnshow,thecompanyofferedatwo-weekwindowinwhichtoorderitsProrsumbagsandouterwearonlineorinstores.Consumerscouldorderitemswithapersonalizeden-gravednameplate;duringthenine-weekturn-aroundperiod,theycouldview,ontheirsmartphones,originalsketchesandvideosoftheiritembeingconstructed.Theyareslatedtothenreceivetheirpurchasesbeforethecol-lectionsarriveinstores.

NeimanMarcushasitsNMService,aperson-alshoppingappthatletscustomersinteractdirectlywith“their”salesassociates.Onceacustomerdownloadstheapp,shereceivesac-cess,viahersmartphone,toapreferredper-sonalshopperwhocangiveadviceliveorsetasidespecificproductsforthecustomertotryonduringhernextstorevisit.Whenthecus-tomerentersthestore,theNMServicelaunches,informingthepreferredpersonalshopper,whocanthengreetandwaitonthecustomer.Theappalsohighlightsupcomingstoreevents,newproductarrivalsandsales,and emerging fashion trends.5

Elsewhere,LouisVuittonhastakenexperi-encesellingtoanotherlevel—literally—with


aninvitation-onlyfloorinitsnewsuper- luxury“maison”shopinShanghai.GearedtoChina’ssuper-wealthy,thefloorisdecoratedlikeadeluxeprivateresidence.Whenshop-pingthere,customerscanhavetheirhairstyledwhileanartistdesignspersonalizedbags for them.6

Theseexamplesjustbegintoexplorethenearlyendlessrangeofpossibilities.Brandscandomuchmoretoreinventin-storeserviceandtoaddexperiencetothesellingprocesssothe“theaterofthebrand”transcendsthephysicalstore.

Participate in new “experiential” business models.Recently,therehasbeenasurge ofinnovativebusinessmodelsinwhichtheexperienceof“sampling”luxurybrandsis theproduct.Onesuchapproachistherentalorsubscriptionmodel.Inthefashionandaccessorycategory,theapproachhasbeenrealizedinnewbusinessessuchasRenttheRunway,Lacquerous,andBagBorroworSteal,whose“members”enjoyhigh-endfash- ionproductsforaslittleas10percentoftheretailprice.

RenttheRunwayallowswomentorentde-signerclothesandaccessories.Rentalsrangefrom$50to$200forafour-nightloan.7Lac-querouspresentsitselfas“anewclubthatal-lowsyoutotryandwearthelatestinredcar-petandrunwaynailtrendswithoutsplurgingon a full bottle every time.”8BagBorroworStealoffersasimilarserviceinhandbags,jewelry,andotheraccessories.9Together,these three brands boast more than 3 million membersandofferaccesstoproductsfrom170 designers.

Althoughsomeseesuchbusinessesasde-mocratizingluxury—perhapsevendilutingtheparticipatingbrands—thenewmodelclearlyresonateswithconsumers,especiallyMillennials.

Similarly,customerscansubscribetoreceiveboxesoffragranceandbeautysamples.Theemphasisisontheexperience;Birchboxap-pealstothethrillofdiscovery.Launchedin2010,Birchboxwasoneofthefirststartupstojumpintothesubscription-basedbusinessofsellingfragranceandbeautyproducts.Fora

$10monthlyfee,subscribersgetamonthlypackageoffourtofivesamples.Manycus-tomershavesigneduptomultipleso-calledbeautyboxservices;someadmittobeinghooked.10ThereisevenablogcalledMySub-scriptionAddictiontocatertothisnewdemo-graphic.11Otherscannotresistputtingtheir“unboxing”experiencesonYouTube.

Thismodelalsolendsitselftosocialmedia.RenttheRunwayrecentlyintroducedaso-cial-shoppingplatform,OurRunway,whichallowswomentoshopbasedonuser-generat-edphotosofrealwomenwithbodytypessimilartotheirown.Andthemodeleventranslatesintothephysicalworld:RenttheRunwaynowhasshowroomsinManhattan.

Luxury markets are fracturing again—although not along the usual fault lines.

Sometraditionalluxury-goodsbrandsandre-tailershavestartedtocatchontothepowerofthesesubscriptionmodelsformarketing,drivingconversion,andcapturingdata;afewarepartneringwiththestartupstobringex-perientialconsumerismtotheirshoppers.U.K.-baseddepartmentstoreHarrodshasteamedupwithGlossyboxtoofferacuratedboxofsamplesizesofcosmeticsbrandsthatHarrodsalreadycarries.Onepromotiongavesubscribersa20percentdiscountatHarrodsforthefull-sizeversionsoftheproducts.

The Push for More Detailed Segmentation and CustomizationIfthe1990swasthedecadewhenluxurybrandsbegantoreachbroadersegmentsofsociety,nowisthetimewhenluxurymarketsarefracturingagain—althoughnotalongtheusual fault lines.

Twentyyearsago,luxuryconsumerswereamore homogenous group. The single greatest factorthatunitedthemwastheirkeeninter-estinaccumulatinglogosasvisiblesignsofstatusandwealth.Today,thesesameconsum-erscomefromallovertheworld;theyare


moreeducatedaboutbrands,moresophisti-catedingeneral,andmuchmoredemanding.Theyarelikelytoshopacrossmultiplechan-nels,andtheyroutinelycommunicateonline.Importantly,theyareanythingbuthomoge-nous—meaningthatyesterday’sage-bracket-edorgeography-specificmarketlabelsmatterfar less.

Considerthe“Chineseconsumer”segment.Inpractice—asmanyleadingluxurybrandshavediscovered—groupingalltheluxurycon-sumersinChinaintoonesegmentmakesnosense.Whilesomegeneralizationsmaystillapply,therearedramaticdifferencesinChinathattranscendthealreadyhugeeconomicvariationsacrossregionsandacrosscities.(SeeExhibit3.)

Oneexampleofthenewandbettersegmen-tationistheso-calledSugarGeneration.ThelabeldescribesChina’saffluentyoungcon-sumerswhohavegrownupwithabundance.Theyhavebeenexposedearlyontoluxurybrandsandlifestyles,sotheirexpectationsandbuyinghabitsare“prewired.”BCGesti-matesthattheSugarGenerationnowac-countsfor13percentofChina’saffluentpop-ulation—andthatitwillgrowtomorethan30percentwithinfiveyears,asthe“wealth

history” of the average Chinese family be-comeslonger.

BothwomenandmenintheSugarGenera-tion espouse very different buying habits than,say,China’ssuccessfulentrepreneursdo—mostofthelattergrouparemenandmanyofwhomaretheparentsofSugarGen-erationchildren.Theseyoungpeopleknowmuchmoreaboutluxurybrands,andtheirpurchasingbehaviorsarespreadacrossagreaternumberofluxurycategories,includ-ingexperientialluxury.(Formoreinforma-tion,seeThe Age of the Affluent: The Dynamics of China’s Next Consumption Engine,BCGFo-cus,November2012.)

Sowhatdosuchnewlyrevealedmarket segmentsmeanforluxurybrandsandretail-ers?Unlikemainstreamconsumercom-panies,manyluxuryfirmshavekepttheir distancefromformalconsumerresearchandanalytics.Somemightsaytheirpreference for“art”over“science”hasindicatedaloof-ness—perhapsevenskepticism—forprovenmethods.Yet,formorethanafewluxuryfirms,fiercebrandprotectionandadefenseofcreativeapproachesseemsjustifiedbytheconsiderablesuccessthatthefirmshaveachieved.

• Mostly men• Age 30–45• High assets, high income

(above 150,000 RMB)• All cities

• Ostentatious, status oriented• Little education on or

knowledge of luxury brands• Big spender

• Watches• Small leather goods• Business gis

• Men and women• All ages• Mid-level income (60,000 RMB)• Tier 3 and 4 cities

• Ostentatious, status oriented• Little education on or

knowledge of luxury brands• Attracted to big brands• Attracted to lower prices

• Skin care• Bags• Watches

• Men and women • Younger• High assets (inherited),

income irrelevant (can be low)• Tier 1 and 2 cities (mostly)

• Discernment• Status oriented, but wants to

convey status and taste• Big spenders• Knows luxury brands• Attracted to niche brands• Heavy users of the Internet

• All categories including fashion, jewelry, and experiential categories such as travel

Demographics

Successfulentrepreneurs Newcomers

SugarGeneration

Luxury attitude

Primarycategories of

luxury purchases

Source: BCG analysis.

Exhibit 3 | Among Chinese Consumers, Luxury Shopping Patterns Vary Greatly


AlthoughBCGagreesthatconsumerresearchshouldneverdetractfromtheimportanceofcreative,brand-enhancingproductstrategies,wecontendthattheformulasforsuccesshavebecomemuchmorecomplicated.Luxurybrandscannowbenefitsignificantlyfromconsumerresearchthatcanyieldfreshinsightsaboutmarketsegmentationandgo-to-marketapproaches.Suchinsightsshouldinformdecisionsaboutstoreassortment,levelsofin-storeservice,allocationofmarketingspending,andpricing.

Theresearchcanalsohelpcompaniesre-spondtocomplexandfast-changingchalleng-essuchasunderstandingthelifecycleofcon-sumervalues—thatis,learningtodistinguishthevaluesthatarebecominglessprominent(ostentatiousluxury),today’sdominantval-ues(uniqueness,craftsmanship),andtheemergingnewvalues(sustainability,experi-entialluxury).

Becauserichersegmentationisneededtoproperlyunderstandthenewdirectionsinwhichluxurymarketsareheaded,BCGisworkingcloselywithAltagammaFoundationtoderiveuniquecustomerinsightsbasedondeepresearchofmorethan40,000consum-ersin20countries.Thefirstreleaseofthere-

portwillbepresentedinthefirstquarterof2014,anditwillbeupdatedannually.

Notes1.“ToInfinityandBeyond:TheNextFrontierofLuxuryTravel,”LuxurySociety.com,September4,2013,http://luxurysociety.com/articles/2013/09/to-infinity-and-be-yond-the-next-frontier-of-luxury-travel.2.“India’sFlashyNewRichDriveLuxuryCarBoom,”Reuters,January3,2012.3.“WhyMillennialsDon’tWanttoBuyStuff,”Fast Company,July13,2012.4.“SoulCycleIsaBoomingExerciseChainforthe 1Percent,”The Daily Beast,July19,2013,http://www.thedailybeast.com/articles/2013/07/19/soulcycle-is-a-booming-exercise-chain-for-the-1-percent.html#url=/articles/2013/07/19/soulcycle-is-a-booming-exercise-chain-for-the-1-percent.html.5.“NeimanMarcusIntroducesNMService,aPersonalShoppingApp,”NeimanMarcuspressrelease,March1,2012.6.“LouisVuittonLuresChina’sSuper-RichwithCustomLeather‘Art,’”Reuters,July18,2012.7.RenttheRunway,http://www.renttherunway.com/how_it_works.8.Lacquerous,https://www.lacquerous.com/how-it-works.9.BagBorroworSteal,http://www.bagborroworsteal.com/howitworks.10.“SeekingaSolution,OneTinyTubeataTime,”New York Times,October31,2012.11.MySubscriptionAddictionblog,http://www.mysubscriptionaddiction.com/about.


NEW GEOGRAPHIESNOT THE COUNTRY MARKETS YOU THOUGHT YOU KNEW

Mostluxuryplayersareplanning for stronggrowthinwhatarestillcalled

“emergingmarkets.”Overall,thisseemsavaluableapproach,giventhattheBRICMITgroupofnations—Brazil,Russia,India,China,Mexico,Indonesia,andTurkey—willcontrib-utearound55percentofgrowthinglobalGDPbetween2012and2017.

Recently,however,BCGhasseenseverallead-ing brands starting to revisit their emerg-ing-marketstrategies.Whilethereasonsdif-ferbycountryandcompany,weobserveconsistentthemesthataretiedtomacroeco-nomicfactors,shiftinggovernmentpolicies,theadvancingstagesofurbanizationandde-velopment,andchangingtastes.

ConsiderChina,forexample.Consumertastestherearechangingveryquickly,inpartbecausethenewChinesegovernmentiscrackingdownonluxurygift-giving,inpartbecausetheone-childpolicyhasspawnedagenerationofso-calledlittleemperors,andpartlygiventherapidriseinconsumers’ incomes.Thesechangesarepalpable,andmanyluxurycompanieshavereportedslow-downsinsalesdespitetheiryearsofinvest-ment in China.

BCGbelievesthatluxuryplayersmustantici-patesuchchangesbyfocusingnotoncoun-try-levelstrategies—oftentheirconventionalmarketlens—butoncity-levelapproachesorat

leastonstrategiesthattargetaclusterofcitieswhoseinhabitantshaveroughlysimilarbuyingbehaviors.Wecontendthatbrandsmustbe-comemuchmorespecificinsizingandscop-ingmarkets;theyneedtoplantheirgo-to-mar-ketstrategiesmoresystematically—includingmarketing,assortment,merchandising,andpricing—atthecityorcity-clusterlevel.

AcomparisonofMumbaiandNewDelhishowswhy.Whilebothcitieshavelargepopu-lationsofhigh-net-worthindividuals(HNWIs),Mumbaiisthemoremultilingualandcosmo-politanofthetwosinceitishometoresidentsfromalloverIndia.(SomelikenthedifferencebetweenthetwocitiestothatbetweenWash-ington,D.C.,andNewYorkCity.)NewDelhi,thecapital,hasmanyinhabitantsfromthenorthofthecountry,andmigrantworkersfromUttarPradeshandBihartothesoutheast.

Whilebothcitieshavetheirshareofentre-preneursandbusinessmen,Mumbaihaspro-portionatelymoreprofessionals—especiallyinfinancialservices.Cultural,regional,andprofessionaldifferencesmeanthatNewDel-hi’s affluent prefer more flamboyant displays ofwealththantheirMumbaicounterparts.

Ahmadabad is another interesting Indian city;itisoftencalledthe“ManchesterofIn-dia”thankstoitsdeepindustrialroots.Itsfast-growingper-capitaincomesaretwicethenational average. So shouldn’t it be a prime


targetforbrands?Notautomatically:earningpoweranddisposableincomeareonlysomeofthemanyspecificstoconsider.Thecity’saffluentarelargelyGujarati,anentrepreneur-ialcommunitythatputsinvestingaheadofspending,cherishesfamilyvalues,lovestrav-el,andprefers“lifestyle”purchases—thatis,experiences—overluxurygoods.

Ofcourse,diversityamongcitiesinthesamecountryisnotuniquetoemergingmarkets.ConsiderthedifferencesbetweenconsumersinMinneapolisandHoustoncomparedwiththoseinNewYork,orbetweenshoppersinParisversusthoseinLyonorCannes.BCG’sfindingisthatcitiesarerapidlybecomingmorerelevantthancountriesastargetmar-ketsforluxuryproductsandservices.

LuxurybuyersinShanghaiandBeijinghavemoreincommonwiththeircounterpartsinParisandTokyothantheydowiththoseinZhenjiangandPanjin.Forthisreason,brandsmustdeeplyunderstandthedemographicandsociographicfundamentalsincitiesratherthan,forinstance,allowingconsumerresearchconductedinacapitalcityto

representbuyingbehaviorsacrossanentirecountry.

A New Index of Luxury BuyingSowherewillgrowthcomefrom?Andwhichcitiesshouldbeprioritiesforluxurybrands?Whereshouldluxurybrandsfocusonopti-mizingtheirexistingretailfootprintsratherthanopeningnewstores?Inwhichcitiesaretouristsspendingfreely?Whichcategoriesoftourists are spending the most?

Tobegintoexplorethesequestions,BCGhasdevelopedtheMetroluxefamilyofindices(collectivelycalledtheBCGMetroluxeIndi-ces)tomeasurethecurrentluxurystatusandgrowthpotentialoftheworld’s550richestcitiesasdefinedbyGDPpercapita.Collec-tively,thecitiesintheindexdrivenearly 50percentofglobalGDP.Theindividual indicesaretheBCGLocalMetroluxeIndex,theBCGMetroluxeGrowthIndex,andtheBCGTotalMetroluxeIndex.(SeeExhibit4.)

Together,BCG’sfamilyofindicesbalancesbothdemandandsupplyfactors.

BCG Total Metroluxe Index, 2017BCG Local Metroluxe Index, 2017 BCG Metroluxe Growth Index, 2012–2017

BCG’s proprietary Metroluxe Indices of the 550 wealthiest cities

69 8

14

7 86

1210

8 9

5 65

14

11

0

5

10

15

20

25

Other3Middle EastWestern EuropeOther Asia(excluding China)2

China1U.S.

Number of cities in each index’s top 50

21

Source: BCG analysis.1Includes Hong Kong and Taiwan.2Includes North and Southeast Asia.3Includes Latin America, Russia, and Australia.

Exhibit 4 | BCG Metroluxe Indices Measure Luxury Buying in Cities Worldwide


• Local Demand.ThismeasuretakesintoaccountHNWIsandthemass-affluentdemographic.BCGdefinesHNWIhouse-holdsasthosewithmorethan$1millionininvestableassetsanddefinesmass- affluenthouseholdsashavingmorethan$100,000inyearlyhouseholdincome,adjustedforlocalpurchasingpowerparityandtaxes.Wealsoconsider,atacountrylevel,thepropensityoflocalaffluentconsumerstospendonluxury.

• Tourist Demand.Thismeasurecalculatestheimpactofdomesticandinternationaltourismonluxuryspendinginthecity.

• Supply-Side Drivers.Thismeasureaccountsfortheinfrastructurethatsupportsluxurysales.Itreflects,amongotherfactors,thematurityofthedistributionnetwork(departmentstores,malls,andkeyshop-pinglocations),logistics(suchasthecompetenceandqualityoflogisticsservicesandcustomsclearance),andthesophisticationoflocalfashiondesignersandthecity’sdesigncommunity.

Takeninitsentirety,thecollectiveindexhelpsidentifyandprioritizefutureluxurygrowthbycity,makingiteasiertoexploreeachlocation’sdistinctdriversofgrowth—forexample,tourismversuslocaldomesticspending.

Let’slookattheBCGLocalMetroluxeIndexfirst.Thisindexprojectstheintrinsicpoten-tialoflocalluxurydemandforeachcityin2017,excludingtouristdemand,supply,andotherfactors.Whileitdoesnotcapturewhereactualpurchaseswilltakeplace,itcanhelpbrandsdecidewheretofocustheirmarketingexpenditures.

TheBCGLocalMetroluxeIndexrevealsthatdespitehighGDPgrowthinkeycitiesinemer-gingmarkets,U.S.citiesaccountfor60per-centofthetop10citiesandmorethan40per-centofthetop50citiesrankedbylocalluxurydemand.Houston,Boston,andPhiladelphiaareinthetop15,indicatinghigherpotentialdemandinthesecitiesthaninShanghai,whichisranked16thontheindex,Beijingat22nd,orevenSeoulat15th.Minneapolis,SanDiego,andDetroit—rankedbetween25thand

30thonthisindex—arebetterpositionedthanKualaLumpurat36th,Mumbaiat43th,andSãoPauloat49th.Thisreflectstheunsur-prisingrealitythattheU.S.ishighlyaffluent,contributingabout20percentofglobalGDP,40percentoftheworld’smillionaires,and 40percentofultra-high-incomeconsumers(thosewithmorethan$30millioninassets).

North and Southeast Asia are prominent on theBCGLocalMetroluxeIndex;theseregionshave9citiesrankedinthetop50.China(in-cludingHongKongandTaiwan)hassixcitiesinthetop50.Interestingly,thewholeofWest-ernEuropeisnearlyaswell-represented,withonlyLondon,Paris,Zurich,Berlin,andMu-nichamongthisindex’stop50.

The index makes it easier to explore each city’s distinct drivers of growth.

TheBCGLocalMetroluxeIndexgivesastaticviewoflocaldemand;however,anotherinter-estingindex—theBCGMetroluxeGrowthIn-dex—providesadynamicperspective,givingretailers’viewpointsofprojectedabsolutegrowthindollars,bycity,from2012through2017.ThisindexshowsChinaandtheU.S.rel-ativelybalancedasthetwomaincontributorstothe“top50”rankingofcities.China(in-cludingHongKongandTaiwan)has10citiesamongthetop50.Thenationboaststhehighestabsolutegrowthinluxury,measuredinU.S.dollars—spurred,nodoubt,bythatcountry’shighGDPgrowth.

TheU.S.has12citiesamongthisindex’s top50—largelyareflectionofrelativeU.S.affluenceandstrongtrendsintourism. GiventheupcomingrelaxationofU.S.visarestrictions,tourismislikelytokeepU.S.citiesrankedhighonthegrowthindex.WesternEuropeancitiesarebetterpos-itionedwhentourismisfactoredin,withninecitiesfromtheregioninthetop50.TheMiddleEastplaceswell,withfivecitiesonthelist,twoofwhichareinTurkey.(Seethesidebar“WhatIstanbulandChicagoHaveInCommon.”)


Luxury brands have often viewed market segments in terms of demographics and countries. But BCG’s analysis confirms that it makes more sense to think in terms of clusters of cities regardless of nationality—conurbations whose affluent buyers have more in common with each other than they do with others in their own nations.

Istanbul is a perfect case in point. With its population of nearly 14 million, the city accounts for most of the nation’s luxury market, which is valued at more than $10 billion and has been growing at about 15 percent annually. Like largely urban luxury markets elsewhere, Istanbul has seen its growth fueled not so much by the super-rich but by an expanding middle class, along with rising numbers of tourists from Europe and the Middle East.

A few statistics tell the story. Thirty percent of the hotel beds in Turkey are in five-star

hotels, compared with only six percent in Spain. Upscale dining, where a meal costs $50 or more, is expanding rapidly, with the number of such restaurants in Istanbul growing by about 10 percent a year. With already 50 high-end restaurants per 1 million affluent people, Istanbul will soon be on a par with London, which has 100. (See the exhibit “High-End Restaurants on the Rise in Istanbul.”)

Much of the luxury purchasing in the city is of brands familiar to affluent consumers everywhere from Chicago to Tokyo: everything from Maserati cars to Gucci fashion accessories. In line with the global trend, experiential luxury is also luring Istanbul’s well-heeled—hence the rapid increase in high-end restaurants, for instance.

500 150

Istanbul

Number of restaurantsper 1 million affluent people

17

100

Izmir

50

16

Ankara

London 100

New York 111

Paris 113

Penetration1

Number ofluxury

restaurants

51

207

218

60

8

6

Affluentpopulation(in millions)

0.45

1.87

2.17

1.2

0.47

0.38

Sources: American Community Survey 2010, U.S. Census Bureau; New York Times Restaurant Key, Family Resources Survey 2010/11, U.K. Department of Work and Pensions (DWP); Harden’s Guides; TUIK (Turkish Statistical Institute); BCG analysis.1Penetration was calculated as the high-income population divided by the number of boutique restaurants. High income was defined as $100,000 in annual income in New York, £52,000 annual income in London, 100,000 TL (Turkish lira) in Turkish cities. Boutique restaurants were defined as those with price ratings of $$$$ by the New York Times restaurant reviews (this rating reflects restaurant dinners costing $55 or more per person), those with dinner prices of £60 per person for London, and those with dinner prices of 100 TL per person for Turkish cities.

High-End Restaurants on the Rise in Istanbul

WHAT ISTANBUL AND CHICAGO HAVE IN COMMON


Whatabouttheworld’sothersuperchargedcities?Moscowranks16th,andSãoPaulois12th.MumbaiandNewDelhihavetheirshareofaffluentindividuals,butneithermakesthetop10.AlthoughIndiancities’de-mandforluxurygoodswillgrowandthena-tion’stradeinfrastructurewillimprove(cur-rently,modernformatstoresaccountforonly38percentofIndianspendingonapparel,forinstance),thechangeswillnotbeenoughtomovethemhighuptherankings,inpartbe-causemanyofIndia’saffluentdotheirluxurybuyingoverseas.(Seethesidebar“WhoIstheMysteryShopper?”)

Thethirdindex—theBCGTotalMetroluxeIndex—isespeciallyusefulwhenitsresultsarecomparedwiththoseofacomplementarymeasure,calledtheBernstein-BCGStoreIndex,whichprovidesacity-by-cityviewofthestorecoverageofparticularcitymarkets.(SeeExhibit5.)TheBernstein-BCGresearchshowsthatsomecitiesinwhichbrandshaveconcentrated—forinstance,Beijing,Seoul,andTaipei—havebecome“overpenetrated.”Oneconclusion:somebrandsmaychoosetoscalebacktheirretailfootprintsinsomeofthosecities.

InothercitiessuchasDallas,Berlin,NewDelhi,Mumbai,andSãoPaulo—wherethereisalargergapbetweenexpectedgrowthandthepenetrationofexistingstores—weexpect

leading brands and retailers to open more re-tailoutlets.Therearealsoquiteafewexist-ingluxury“capitals”—NewYorkandMilanamongthem—whichseemsurprisinglyun-derpenetrated.Thosecitiesaremagnetsforluxuryspendingbyinternationaltourists.

Insights to Help Brands Succeed as Demand Patterns Shift WorldwideBCGenvisionsthreewaysinwhichtheseindi-cescanhelpbrandsandretailers.

Conduct deeper market analyses at the city and cluster-of-city levels.Brandsandretailersarmedwithadeeperunderstandingoflocaldemandandconsumerbehaviorsaswellasmore information about tourism and infrastructureatacitylevelcanclustercitiesbeyondthegeographicboundariesofcountries.

Tobeginwith,suchcompanieswilldiscoverthatgo-to-marketstrategieswillneedtovaryacrosscitiesinagivencountry.ConsiderDongguan,forinstance.Thisfactorycityisquiteaffluent;itishometo2percentoftheChineseindividualswhohaveassetsofmorethan$1.6million.Yetthecityalsolacksma-jortransportnetworksandaconvenientair-port.Asaresult,manyofitswealthyshopin-ternationally or in nearby Hong Kong.

Where is Mr. S. from?

He’s married, with two children. He works for an international bank and has a master’s degree in business administration from Columbia Business School in the U.S.

He wears Brioni, Canali, and Zegna suits, and he has a collection of watches that includes Breitling, Patek Philippe, and Hublot. He wears shoes by Ferragamo and Mauro Volponi.

Mr. S—he’s a real person—likes to shop in specialty boutiques; he frequently travels internationally and often shops while a-

broad. He is very discerning about what he buys: he prefers to buy handmade, high-quality products rather than “buying a brand.”

Is Mr. S. from Chicago? London? Paris? Yokohama? No.

Rahul Sangupta (not his real name) was born in New Delhi and lives in Mumbai. He’s one of India’s elite—the nation’s highest earners. Sangupta has more in common with other affluent individuals in London and Singapore than he does with consumers in most cities in his native country.

WHO IS THE MYSTERY SHOPPER?


AlthoughmarketinginDongguanstillmat-tersforluxurybrands,aretailpresencethereislesscritical.

Sydney and Melbourne are other interesting citieswhereexpectedlong-termincreasesinwealth,coupledwithburgeoningtourismfromChinaandJapan,willbuoylocalde-mandforluxurybrandsforyearstocome.

Fromamarketingperspective,therefore,brandsneedtokeepmarketinglocallyandalsomarketwellintourists’countriesofori-gin.Fromaretailperspective,assortmentsneedtocatertodemandfromlocalsaswellas tourists.

Localize go-to-market strategies. It is no longer enough for brands to target the elites inemergingmarketswithsplashyadsforexisting“Western”productsandretailassortments.Now,astutebrandsarelocaliz-ingtheirproductsandapproaches.Forexample,Hermèshascreateditssaricollec-tioninIndia.L‘OréalboughtYueSai,aChinesecosmeticsbrand,andinBrazil,LVMHboughtSack’s.

Montblancisonecompanythatistakingitslocalizationinitiativestothecitylevel.Thepenmakersuccessfullyoperatesretailpointsinfirst-andsecond-tiercitiesinIndia,andithasregionalizeditsmarketingmaterialsac-cordingly.Storeassortmentsalsodeservetobelocalized.

After surveying assortments offered in stores worldwide,BCGhasfoundthatbest-practiceluxurybrandsaggressivelycustomizethere-tailassortmentacrosscities.Forexample,acomparisonofmonobrandstoresinNewYorkandHoustonrevealedthat31percentoftheitemssoldintheNewYorkstorescostmorethan$2,000comparedwithjust14per-centofthosesoldintheHoustonstores.(SeeExhibit6.)

Storeformatcanalsobenefitfromlocaliza-tion.Thesedays,one-size-fits-allflagshipstoresineverycityarefarlesseffectivethandifferent formats applied to different tiers of cities.Gucci’snewapproachtoChinaisagoodexample.François-HenriPinault,chair-manandCEOofGucciparentcompanyKer-ing,explaineditthiswaytoJing Daily:“Gucci

New York

Nanjing

Munich Mumbai

Moscow

MilanMiamiMexico City

Los Angeles

London

City potentiallyover-stored givencurrent storesversus luxurypotential

City with potentialfor additionalstores givencurrent storesversus luxurypotential

Las Vegas

Singapore

Honolulu

Hong Kong

HangzhouFlorence

Dubai

Barcelona

DallasChengdu

New Delhi

Bernstein-BCGStore Index 20121

BCG Total MetroluxeIndex, 2017

Berlin Zurich

Tokyo

Taipei

Shenzhen

Shanghai

Seoul

Beijing

Sao Paulo

Busan Rome

Paris

Osaka

Chicago

Bangkok

Shenyang

Istanbul

Sources: Brand websites; Sanford C. Bernstein; BCG analysis. 1Store counts for 24 luxury brands; weightings adjusted for store size and sales/square foot.

Exhibit 5 | The BCG Total Metroluxe Index Suggests Some Cities May Be “Over-Stored” by Luxury Brands


ishavingtocontendinChinawithagrowinggapbetweenconsumerspendinginmajorur-bancenterslikeShanghaiandBeijingandinsecondarycitieswhereluxurybrandsarestilla novelty.”1

The phenomenal prolifera-tion of tourism will continue to drive growth for brands.

Gucci’stieredapproachtoretailandmer-chandisingmeansthatincitieswherethebrandalreadyhasgoodbusiness,thefullproductofferingisavailable.Bycontrast,innewlocationsGucciwilloffer“entry-levelleathergoodsandaccessoriesbeforegradual-lyintroducingready-to-wearandotheracces-soriesasconsumertastesmature.”Inaddi-tiontothenewtieredmodel,thebrandwillpaymoreattentiontooptimizingwithinex-

istingcities—movingstoresaswellasreno-vatingandexpandingexistinglocations.

Withlocalizedgo-to-marketstrategiescomesaneedforsimplicityofbranding.Earlyef-fortsareunderway:in2012,Dolce&Gabba-nafoldeditssecondaryD&Gbrandintothemainlabel.Similarly,U.S.departmentstoreBarney’shasdecidedtorenamealltheCo-opstoresasBarney’s,eventhoughitmaymeanthatsmaller-formatstoresofferdifferentas-sortments than those at the flagship stores.

Develop aggressive strategies for reaching tourists. The phenomenal proliferation of tourismwillcontinuetodrivegrowthforbrands.Brazilians,Chinese,andIndianshavebeenespeciallykeenspenderswhileonvacationabroad.Chinaissettobecomethelargest“sourcemarket”foroutboundtravel;touristsfromthatcountryarenowtheworld’sbiggestgroupoftax-freeshoppers.By2020,itsoverseasvacationerswillconstituteroughly10percentoftheinboundtouristsin

200

Pricing at luxury monobrand store in New York City(% by price range)

100

80

60

40

20

100806040

<50<100<300<500<1,000<2,000<4,000

Pricing at luxury monobrand store in Houston(% by price range)

Prices (US$)

Apparel

Bags

Shoes

Small leathergoods

Jewelry

Misc.1

Apparel

Bags

Shoes

Small leathergoods

Jewelry

Fragrance

Misc.1

% of assortment % of assortmentPrices (US$)

100

80

60

40

100806040

20

0 20

<50<100<300<500<1,000<2,000<4,0009%

22%30%22%17%

0%0%

31%

69%

1%13%24%31%26%

5%0%

14%

81%

5%

Source: BCG store visits and analysis.1Includes hats, gloves, ties, socks, scarves, and underwear.

Exhibit 6 | Best-Practice Luxury Brands Customize Assortments to Individual Cities


theU.S.,30percentoftouristsvisitingJapan,30percentofthoseinSydneyandMel-bourne,and20percentofforeigntravelersinSingapore.InSouthKorea,Chinesetouristsalreadyconstitute30percentoftheforeignvisitortally—anumberthatisexpectedtoreach50percentjustfouryearsfromnow.

Chinesevisitorstypicallyspend40percentoftheirtravelbudgetsonshoppingoncetheyreachtheirdestinations,mostlyonluxurygoods and premium brands. Similar patterns play out in the Middle East. Istanbul is a strongbeneficiaryofthistrend,drawingvisi-torsfromSyria,Iran,Iraq,andAzerbaijan,forexample.

Thekeyforluxurybrandsandretailersistounderstandthetouristmixatacitylevelandtothendevelopstrategiesthatcreatebrand

awarenessbeforethetourists’journeysbegin,startingintheirhomecountries.Atthemostfundamentallevel,brandsmustprovide signageandotherassistanceinthetourists’native languages at the holiday destinations. Andtheymustinvestintravelretail,giventourists’propensitytobuyluxurygoodswhileintransit.(Formoreinformation,seeWinning the Next Billion Asian Travelers—Starting with China, BCGFocus,December2013.)

Note1.“WhatGucci’sNewTieredModelCouldMeanforChina’sLuxuryMarket,”Jing Daily,February21,2013,http://www.jingdaily.com/what-guccis-new-tiered-mod-el-could-mean-for-chinas-luxury-market/24109/.


NEW BUSINESS MODELSWHY ALTERNATIVE APPROACHES NOW MATTER SO MUCH

Thereoncewasatimewhenluxurycompanieswereessentially“brand

islands”—havensofhautecoutureandhigh-pricedexclusivitywhoseisolationfromotherbusinessentitieswasessentialtotheluster of their brands.

Suchararifiedapproachislesstenabletoday.Inaworldofincreasingopenness—betweencustomersandsuppliersandbetweenshop-persandbrands,andwithlinesblurringbe-tweencompetitionandcooperation—compa-niesbenefitbybringinginideasandexpertisefromtheoutside.(Formoreinformation,seeLuxury Ecosystems: Controlling Your Brand While Letting It Go,BCGFocus,June2013.)Inmostotherbusinesssectors,seniorexecutiveshavelongacceptedthattheirorganizations’futuregrowthreliesheavilyonsuccesswithnewtechnologiesandinnewmarketcategories,cities,andchannels—aspectstheyknowtheycannotmasteralone.Sotheyhavedeliberate-lyforgedlinkstootherentitiesandwoventhemselvesintoself-sustainingnetworks.

Luxurybrandsmustdothesame.Althoughmanyalreadyhaverichpartnershipswithotherbusinesses,onthewhole,theyhavebeenneitherasfocusedonpartneringnorasskilledatitascompaniesinotherretailsec-tors.Inshort,luxuryfirmsmustdomoretopartnerbetter.Threefacetsofpartneringinparticulardeservegreaterattention;weex-plorethesebelow.

Reinforcing Partnerships and Sharing with RetailersHistorically,brand-retailerrelationshipshavebeenlessdevelopedintheluxurysectorthaninmass-marketcategories.Withproductssuchashouseholdsupplies,foodandbever-age,andbeauty,thoserelationshipscanbedeepandbroad,helpingtoacceleratetop-linegrowthbyincreasingconversionrates,reduc-ingout-of-stockincidents,improvingpromo-tion,andsoon.Manymakersoffast-movingconsumergoodshave“categorycaptains”—managersorsupervisorsdedicatedtodrivingthosegrowthfactors.

Luxurybrandshavenotdevelopedcompar- ablystrongtiesformanyreasons:theirownneedfortightcontroloftheirbrands,therel-ativescarcityofcustomerdata,andthefactthatmanyretailershavebeenunwillingtosharetheircustomerdataandhavebeenkeentocultivatetheirownbrandidentities.Butthesedays,bigdataandcustomerrela-tionshipmanagement(CRM)toolsmeanthatmorecustomerdataisaccessible.

Therearenowrealisticgroundstobelievethatbrandsandretailerscansharealittletogetalot.Forexample,brandsmightseekfromretailersgreatervisibilityofstore-orSKU-levelsalesdatainexchangeforexclusiverightstosellnewproductsforaperiodoftimebeforeabroadermarketlaunch.Ortheymightofferretailersexclusivepackagingor


uniqueeventstogaindirectaccesstohigh- spendingcustomerssothatthebrandscangleandeeperinsightsthroughfeedbacksur-veysorproducttrials.

Inshort,brandsandretailerstodayhavegreater opportunities to boost sales by bring-ingtherightproductstocustomersattherighttimesthroughtherightchannels.Theycanalsogainbyusingtailoredcustomerex-periencestostrengthenbrandequityforbothparties,andbyjoiningforcestopushomni-channelapproachestothenextlevel.

Reframing the Value of Licensing and Joint VenturesAlthough brands have a history of developing licenses,thosearrangementshavenotalwaysbeen of lasting benefit. There have been in-trinsicconflictsofinterest—thedurationoftypicalcontracts,forinstance,androyaltystructuresthataregenerallydrivenbysalesratherthanprofits.Consequently,someluxu-ryhouseshavebegunbuyingbacklicensestogainmorecontrolovertheirbrands.ThierryAndretta,CEOofLanvin,putitthisway:“Col-laborationonlyifit’sright;licensing,no.Wewanttocontrolourdestiny.”1

Butbuyingbacklicensesmightnotalwaysbetherightpath.Thesedays,enrichingpartner-shipscanbemoreeffectivethankillingthem.Jointventurescanbeaprimewaytoappro-priately align both parties’ interests. For in-stance,Kering,whosebrandsrangefromBri-oniandStellaMcCartneytoPumaandBottegaVeneta,hasjoinedforceswithYoox,theonlineluxurychannel,todevelope-com-merceforseveralofitsbrands.

Leveraging Vertical EcosystemsInthelasttwodecades,manyluxurybrandshavemovedtopartneroracquireownershipofeitherupstreamordownstreamelementsoftheirvaluechains—andsometimesboth.Thereasonsaremany—toassuresuppliers,toreduceriskstoquality,ortocapturemoremanufacturingmargin,forinstance.2

Chanelhastakenadifferentapproachwiththecreation,in1997,ofitsParaffectioncom-pany.Thecompanycomprisesindependent

ateliersd’art;almostallarefirmssuchasthemakersoffabricflowers,buttons,orembroi-dery.Chanel’stwistonverticalizationistolettheseworkshopsoperateindependently—evenlettingthemsupplyitscompetitors. Lesage,forinstance,suppliesitscoutureem-broidery to Dior.3Onaverage,thesespecial-istsgetabout40percentoftheirrevenuesfromclientsotherthanChanel.4 Chanel de-scribesParaffectionasaframeworkforen-suringthesurvivalofthe“ecosystem”ofcou-turespecialistsratherthanasamechanismformaintainingeconomiccontrol.

Bycontrast,SwatchGrouphascutbackonthird-partydealstofocusonitsownbrands.Onekeybusinesssegment—production—man-ufactureswatchesandchronologicalwatchmovementsalongwithjewelry.Itselectronic-systemsunitdevelopsandproduceselectroniccomponentsandsystemsrelatedtowatches.Thecompanyhasalsoestablisheddirectdistri-butionandretailchannels,whichincludemonobrandstoresandanetworkofmulti-brandprestige-watchandjewelryboutiques.

Thereisnooneapproachtoverticalizationthatworksforall.Butthestrategysignificant-lyaffectstheluxurybusiness.Ittelegraphstopotentialnewcomersthatthebarrierstoen-tryareexceptionallyhigh.Italsoconfersgreaternegotiatingpowerforresourcesrang-ingfromretainingrare“know-how”andac-cesstoscarcematerialstocreatingcompeti-tive advantage.5

Notes1.“FTBusinessofLuxury:LicensingvsCollaboration,”LuxurySociety.com,June10,2011,http://luxurysociety.com/articles/2011/06/ft-business-of-luxury-licens-ing-vs-collaboration.2.FranckDelpal,“VerticalIntegrationinLuxuryCompanies:ObjectivesandEffects,”UniversitéParis-Dauphine,InstitutFrançaisdelaMode,June2011.3.“MaisonLesageAtelier—RealizingDreams,”CoutureNotebook.com,November17,2012,http://couturenotebook.com/2012/11/17/maison-lesage-ate-lier/.4.“ParAffection—LesMétiersd’Art,”DailyLuxuryblog,December10,2007,http://dailyluxury.blogspot.com/2007/12/les-mtiers-dart.html.5.FranckDelpal,“VerticalIntegrationinLuxuryCompanies:ObjectivesandEffects,”UniversitéParis-Dauphine,InstitutFrançaisdelaMode,June2011.


THE PERSISTENT RISE OF DIGITAL

Forluxurybrandsasfor every other typeofbusiness,thedigitaldomainis

heretostay.Butit’sadomainwherecompa-niesarestillfeelingtheirway.Thisleavesanenormous opportunity for the brands that arequickesttodistinguishwhatworksfromwhatdoesn’t.

Affluentconsumersareleadingthedigitalchargeinluxury,asinothersectors.IntheU.S.,about40percentofaffluentconsumers(thoseearningmorethan$100,000ayear)ownatabletand65percentownasmart-phone.1Three-quartersofaffluentbuyersmadepurchasesonlineinthepastyear.A- bout80percentoftheconsumersinthisde-mographicusesocialmedia,withFacebook,LinkedIn,andTwitteramongthenetworksusedmost.Althoughuseofsocialmediaskewstowardyoungerpeople,matureafflu-entconsumersarehighlyengagedonlinetoo.

Untilveryrecently,businessleadersmadedefinitedistinctionsbetweentheirdigitalchannelsandtheir“conventional”salesandcommunicationspaths.Butthoseboundar-iesarequicklydisappearing.Oneconsumermightresearchhandbagsonlineandthenpurchaseabagoffline.Anothermightbuy ajacketonlineandthenpickitupina“bricksandmortar”store.Andstillanotherindividual might try on shoes in a store but purchasethemonlineinordertogetadif-ferentcolor.

The proliferation of smartphones and tablets hasacceleratedthistrend;“mobile”isevery-where,anytime—andatallstagesofpurchas-ing.Evenbeforebuyersenterastore,theyareresearchingandaccessinginformation.Whileinthestore,theyarecheckingproductre-views,orderingout-of-stockitems,andusingmobile payment solutions. And after they leavethestore,theyarewritingreviewsandpostingrecommendations.

Theinterplayofofflineandonlinechannelbehaviorsvariesbycategory.Forexample,furnitureanddecorseesmoreactivityintheresearch-online-then-purchase-offlinepattern,whereasshoesaresusceptibletoshowroom-ing,inwhichconsumersresearchabrandorproductoffline—ofteninastore—andthenpurchaseonline.

Slowlybutsurely,luxurybrandshavebeenrespondingtoconsumers’digitalenthusiasm.Onlinesalesaretoobigtoignore:BCGesti-matesthate-commercebrings17percentofU.S.luxurysalestodayandthatluxurye-com-merceisgrowingtwiceasfastastheoverallU.S.luxurymarket.Luxurye-commercein-cludesbrands’Websites—whichaccountfor20percentofonlineluxurysales—andmulti-brandonlinesites,suchasthoseofdepart-mentstores,specialtystores,andsingle-cate-gory(suchasshoes)onlineplayers.Themultibrandsitesaccountfor80percentofto-talonlinesalesofluxuryproducts.Manyare


attractedtotheeconomicsofthedigitalworld—particularlyitsrelativelylowinvest-mentcosts.Ingeneral,brandsarebecomingmorecomfortablewithhowtheirreputationscanbemanagedinthedifficult-to-controlen-vironmentofe-commerce.

The Importance of E-commerce and Omnichannel MasteryForthosewithestablishede-commerceopera-tionsindevelopedonlinemarketssuchastheU.S.ortheU.K.,Internetsalescanaccountfor10to20percentoftotalretailsales.Riche-montreportedeye-openingresultsforitson-lineCartierpresence:initsfirstyear,theon-lineoperationbecameCartier’sfourth-largestrevenuegenerator,behindthephysicalstoresonMadisonAvenueandinBeverlyHillsandCosta Mesa.2LifestylebrandToryBurchnowgetsmoreofitsbusinessfromtoryburch.comthanfromanyphysicalstore.3

In luxury e-commerce, brands must master the “3Cs”: com-merce, content, and community.

Tobesuccessfulinluxurye-commerce,brands must master the “3Cs”: commerce, con-tent, and community.First,itisimportanttohave a great site for commercethatallowscon-sumerstoseetheproductandthatofferseasyandintuitivenavigation;onitssite,forexample,SaksFifthAvenuedisplayseveryclothingproductwithashortcatwalkvideo.Second,suchsitesmustprovideunique,richcontentaboutbrands;Net-a-Porter,forin-stance,hasitsownfashionmagazine.Third,itiscriticaltobuildastrongconsumercommu-nity;Sephoraoffersanexampleofthisbyen-couragingconsumerstosharetheirpurchasesandrecommendationswiththeirfriendsandothersviapostsonFacebookandPinterest.

Butmasteryofthe3Csisnotenough.Beyonddevelopingattractivee-boutiques,brandsmustalsofocusonomnichannelstrategiesandintegratee-commerceandofflineretail.Asbrandsseektomaximizethelifetimeval-ueofconsumers,theywillwanttofocuson

oneofthekeyfindingsofBCG’sstudy:omni-channelconsumersaremoreengagedandspendatleasttwiceasmuchasoffline-onlyoronline-onlyconsumersdo.

ToryBurchappearstobeontopoftheomni-channelmandate.Toenticeconsumerstousemobilechannels,thebrand’smobileapppro-videsexclusiveproducts(SKUsthataren’tpromotedthroughotherchannels),exclusiveoffers(automaticfreeshipping),andexclu-sivecontent(ToryCityGuides).U.S.depart-mentstoresarealsoleadingthecharge,offer-ingdeliveryfrom,pickupat,andreturntostores—oftenforfreebecausethemarginsforluxuryproductscangenerallyaccommo-datetheextracost.

Onechallengetoomnichannelsuccessistherequisiterethinkingoftheorganizationmod-el.Itisdifficultforasingledepartmenttoen-compassseparateonlineandofflineteamsandstillprovideaseamlesscustomerexperi-enceacrosschannels.Fullymergedteams aren’ttheanswereither;theycandetractfromtheflexibilityandagilityoftheonlinegroups. Hybrid models are probably the opti-malsolution;eachbrandmustfindtherighthybridapproachforitscase.

Revisiting Channel Roles and Sorting Out New Channel ConflictsAlthoughsomeluxurybrandsmightbeabletofocuslargelyontheirowne-commercechan-nels,thefactisthatinmanycategories,con-sumersexperiencebrands—andbuythem—acrossmultiplechannels.Therefore,brandsmustconstantlyconsiderthefullspectrumofchannels.Thereisnoshortageofoptions:mul-tibrande-retailerssuchassaksfifthavenue.comandharrods.com;specialiste-retailerssuchassephora.comandtourneau.com;pureonlineplayerssuchasNet-a-PorterandZappos;flash-salesitessuchasGiltandvente-privee;andevenmarketplacessuchasAmazonandeBay.Althoughthesechannelsofferallkindsofop-portunities,theyalsoraisebigissues,suchas:

• More Intense Competition Across Channels. Manyretailersprovidecustomerproposi-tions—suchascross-sellingsuggestions,videosoftheproducts,betterzoom


functionalityfortheproductimages,enhancedsizeguides,andproductreviews,forinstance—thatarebetterthanthoseonthebrands’ownsites.

• Total Price Transparency. While this isn’t an issueforallluxurybrands,somefindthatpricevariationsthatwerenotobviousinthephysicalworldarealltooevidentonline.Forfirmsthathavemanysub-brandsanddeepdistributionacrossmultiplesaleschannels,thisisahugehurdle;forthosethatdiscountaswell,transparencybecomesevenmorechallenging.

• Risk of Overexposure.Thewide-openaccessibilityoftheWebcontrastssharplywiththeinherentlimitationsofexclusivephysicalstores.

Luxurybrandsmustredefinewhatroleeachchannelshouldplayintermsofbrandbuild-ing,volumecontribution,andprofitgenera-tion.BCG’sproprietaryanalysisshowsthatthemaindriversofeconomicvalueonlineareprice(moreexpensiveitemsgenerallycostmoretoship),storeturns(SKUsthatturnfastincurlowerinventorycosts),andtheweightandsizeofitems(fragrancesandbeautyprod-uctscostrelativelylittletoship).Forinstance,shippingahigh-pricedjaroffacialmoisturizerorserumcanyieldveryattractivemargins.

Whenalltherequisitefactorsareconsidered,brands’marginscanvarygreatlyacrosschan-

nels,asseenintheexampleofoneproviderofbeautyproducts.(SeeExhibit7.)Unsurpris-ingly,departmentstoresarelessprofitableforbrands,largelyduetotheirhigh-servicemodels.E-retailerscanbemoreprofitablethanabrand’sowne-boutique,unlessamar-ginalviewistaken(thatis,anassessmentbasedonmarginalcosts,beforetheallocationoffixedcosts)orunlessane-boutiquereach-esacertainscale.

Withadeeperunderstandingoftheeconom-icsandconsumerpurchasingbehavioruniquetoeachchannel,luxurycompaniescanredefinetheroles,resources,andap-proaches(includingtargetconsumers,assort-mentandmarketing,andcosttoserve)ap-propriatetoeachchannel.Theycansharpendifferentiationsinproductassortment,pric-ingpolicy,andmarketingandcommunica-tion.Andtheyneedtoassumemoreofatest-and-learnapproachratherthanstrivingforthe“perfect”channelstrategy.Noneofthiswillbeeasy—omnichannelmasterydoesn’tcomeovernight—butthepayoffissubstan-tial.Itmustbeakeyareaoffocusforluxurybrandsinthecomingyears.

Benefiting From the Rise of “Social” MarketingSocialmediaistheotherdigitaldomainthatbrandsmustmaster.Asnotedearlier,affluentconsumersspendplentyoftimeonFacebookandothersocialsites.BCGhasbeentallying

140

115130

75

100

0

50

100

150Product profitability index by product

E-boutique/brandname.com(marginal view)1

E-boutique/ brandname.com

E-retailerLuxurydepartment

store

Masstigedepartment

store

Illustrative example: luxury beauty products

Source: BCG experience.1Marginal view refers to assessment of profitability based on marginal costs, before the allocation of fixed costs.

Exhibit 7 | The Profitability of Luxury Brands Varies Greatly by Channel


Facebook“fans”ofleadingbrandsformorethanthreeyears,andthefiguresshowsteepincreasesoverthatperiod,asurprisingfind-inggiventhatFacebookisnowarelativelymaturesocialnetwork.

Theluxurysectorhasmoreworktodoto understandhowbesttousesocialmarketingtoincreasecustomerengagement,developnewmarkets,andencourageandenablebuy-erstobebrandadvocates.Itisnotenoughsimplytocollect“fans”andcelebratethenumberof“Likes.”

BCGfindsthatsocialmediacanbeespeciallyeffectiveforreachingnewcustomersinde-velopingeconomies.Inemergingmarkets,thereisa“straighttosocial”trend:forexam-ple,IndiaandIndonesiahaveInternetpene-trationof10percentand25percent,respec-tively,and80to90percentofthoseonlinearealreadyusingsocialmedia.(Formorein-formation,seeThe Internet Economy in the G-20: The $4.2 Trillion Growth Opportunity,BCGReport,March2012.)

Increasing social engagement among cus-tomers.Asnoted,it’sonethingtoamassalotoffansbutquiteanothertoengagethemdeeplyandthenconvertthatengagementintosales.Engagementismorechallenginginsocialmediabecausebrandsandretailershavelesscontrolovertheirmessages.

“Prosumerism”isonewaytobolsterengage-ment;consumersproactivelyparticipateinthedesign,manufacture,ordevelopmentofaproductorservice.Forexample,EstéeLauderlaunchedcontestsinwhichFacebookfansse-lectedolderproductsthattheywouldputbackintoproduction.AndTiffany&Co.isworkingwithprosumerstococreatecon-tent—forinstance,consumersuploadtheirownphotostoitssiteandtellpersonallovestoriesonTiffany’s“TheArtofRomance”and“WhatMakesLoveTrue”pages.Overall,thesebrandsarecreatingrelevant,attractive,andauthenticcontentwithwhichtoestablishdialogueswithconsumersandboostengage-ment and ultimately sales.

Encouraging and enabling advocacy of brands.Asthesocialmarketinglandscapeevolvesandmicrotargetingtechniques

improve,consumersarebeginningtosufferfrominformationoverload.That’swhytheyaregoingbackto“trustedsources”—thatis,otherusers—tohelpfilterinformation.InarecentBCGsurvey,76percentofconsumersintheU.S.,74percentinBrazil,and78per- centinChinasaidwordofmouthisatrustedsourceofinformationforpurchasingdeci-sions.Thiscompareswith37to53percent(dependingonthecountry)ofconsumerscitingbrands’Websitesasatrustedsource,26to36percentcitingadvertising,and 29to44percentcitingadvicefromin-storesalespeople.(Formoreinformation,seeThe Resilient Consumer: Where to Find Growth amid the Gloom in Developed Economies, BCGFocus,October2013.)

Withthatinmind,manycompanieshavebeenstrivingtomasteradvocacymarketing.Thereisnothingnewabouttheideaofcreat-ingbrandadvocates—thoseenthusiastswhowillinglyandindependentlyevangelizeaboutabrand.Buttheriseofpaidadvocacyisworthwatching.

Manybrandsarenowpayingthetravelcostsof influential bloggers and even “gifting” them.Thisapproachshouldbepracticedwithcautionbecauseconsumersmayseeitasinauthenticatbestandunscrupulousatworst.BCGarguesthatthereismorepowerindevelopingaltruistic,reciprocalrelationshipswiththemost-criticalinfluencerstoturnthemintoauthenticadvocates.(Formoreinformation,seeHarnessing the Power of Advocacy Marketing,BCGFocus,March2011.)Advocacyinitiatives,asstand-aloneprogramsorcoupledwithCRMsystems,canhaveahugeimpact—inwaysthatareinvisibletocompetitors.

Notes1. The 2013 Ipsos Affluent Survey.2.LucaSolca,“DigitalFrontier”BNPParibas,September 2013.3“TheBestBrandContent,FashionEdition,”Fast Company,July27,2012.


TEN TOP AGENDA ITEMS FOR LUXURY EXECUTIVES

Sohowshouldluxuryexecutivesstarttosteertheirorganizationstowardthe

future?Thefollowingtenthemesshouldbeontheagendaatthenextleadershipmeeting.

1. Raise the level of consumer understanding. Luxurycompanieshavenotbeenparticu-larlyconsumer-oriented.Today,theirmarketscomprisemanyspecificsegments,eachwithdifferentaspirations,behaviors,andattributes.Itiscrucialtounderstandthemotivationsandneedsofeachdistinctsegment—andthencustomizerelation-shipsandgo-to-marketstrategies.

2. Localize by city or cluster of cities. It is increasinglyimportanttodecidewhattoselltowhomandhow.Itisevenmoreimportanttomakethesedecisionscitybycity(orbyclustersofcities)inordertocatertoaffluentlocalclientsandinterna-tionaltourists.Citiesratherthancountriesprovide the most valuable lens through whichtoviewconsumers.

3. Develop a clear tourist and travel strategy. Suchastrategymustencompassthreeelements:arevisedincentiveandorganizationstructurethatpromotestourist-and-travelretailandcutsacrossacompany’sinternalsilos;significantmarketingintourists’homecountries,withsomesupportmarketinginthe

holidaycountries;andcustomizedin-storeexperiencesintheholidaydestinations(forexample,adsinthetourists’languages).

4. Invest in experiential luxury.Noluxuryfirmcanignoretheacceleratingshiftfrom“having”to“being.”Therearenowmanywaystodiversifyabrand—throughrentingorsampling,forexample.Brandscanalsodeliveroutstandingin-storeexperiencesforeachcustomer;retailtain-ment—usingeventssuchasartinstalla-tionsandfashionshowstomakethein-storeexperiencemoretheatricalandmemorable—isagoodwaytodothat.

5. Do not overlook the myriad of opportunities in countries where luxury buying is long- established—even as you keep pushing into emerging countries.U.S.citiesrankas12ofthetop50citiesworldwideexperiencinggrowthinluxurypurchases—that’stwomorecitiesthanChina(includingHongKongandTaiwan)hasonthelist.

6. Simplify brand architecture. Today’s consumersareunwillingtodealwiththecomplicationsofmultiplebrandidentitiesunderacorporatebrand.Thesame“brandname”canbestretchedacrosspricepointsandcategoriesorusedtotargetdifferentconsumersegmentswhilemaintainingaconsistentimage.


7. Build new ecosystems of partnerships. Luxuryfirmsmustfindwaystobeincontroloftheirbrandswhilebeingmoreopenwithretailersandsuppliers.Formostfirms,newgrowthwillcomefromnewcategories,newgeographies,newchannels,andnewtechnologies.Luxuryfirmsareunlikelytomasterallthesenewfrontsontheirown.

8. Apply the 3Cs to boost e-commerce. Find waystoexcelincommerce, content, and community.Promoteomnichannelmarket-ingsothatonlineandofflineinteractionsbecomepartofthesameexperienceforconsumers.

9. Rethink channel priorities and strategies. Promotee-boutiqueande-retailingapproacheswithclearobjectivesanddifferentiatedrolesandassortments.

10. Build advocacy marketing. Generate positive“wordofmouth”byleveragingcloserelationshipswithkeyinfluencers.


The Boston Consulting Group publishes other reports and articles on the topic of luxury that may be of interest to senior executives. Recent examples include:

Winning the Next Billion Asian Travelers—Starting with ChinaA Focus by The Boston Consulting Group and TripAdvisor, December 2013

The Resilient Consumer: Where to Find Growth amid the Gloom in Developed Economies A Focus by The Boston Consulting Group, October 2013

Luxury Ecosystems: Controlling Your Brand While Letting It GoA Focus by The Boston Consulting Group, June 2013

The Age of the Affluent: The Dynamics of China’s Next Consumption Engine A Focus by The Boston Consulting Group, November 2012

Luxe Redux: Raising the Bar for the Selling of LuxuriesA Focus by The Boston Consulting Group, June 2012

Harnessing the Power of Advocacy MarketingA Focus by The Boston Consulting Group, March 2011

The New World of LuxuryA White Paper by The Boston Consulting Group, December 2010

FOR FURTHER READING


About the AuthorsOlivier Abtan is a partner and managing director in the Paris office of The Boston Consulting Group. Antonio Achille is a partner and managing director in the firm’s Milan office. Jean-Marc Bellaïche is a senior partner and managing director in BCG’s New York office and the global leader of the luxury, fashion, and beauty topic area. Youllee Kim is a partner and managing director in the firm’s Seoul office. Vincent Lui is a partner and managing director in BCG’s Hong Kong office. Amitabh Mall is a partner and managing director in the firm’s Mumbai office. Antonella Mei-Pochtler is a senior partner and managing director in BCG’s Vienna office. Sarah Willersdorf is a principal in the firm’s New York office.

AcknowledgmentsThe authors would like to offer their sincere thanks to Sonja Bader-schneider (partner and managing director, Helsinki), Olavo Cunha (partner and managing director, São Paolo), Joel Muniz (partner and managing director, Mexico City), Abheek Singhi (partner and direc-tor, Mumbai), Miki Tsusaka (senior partner and managing director, Tokyo), Deran Taskiran (former partner and managing director, Istanbul), Jessica Smith (project leader), Paolo Meroni (project leader), Marjorie Condoris (consul-tant), Aditi Sawhney (consultant), Bobby McWatters (associate), Gilli-an Moore (senior analyst), and other BCG colleagues for contribu-ting their insights and for helping to draft this article. Special thanks go to Mario Ortelli, senior research analyst in the luxury goods sector at the research firm Sanford C. Bern-stein, for his thought partnership.

They would also like to acknowledge John Kerr for his editing and writing assistance, as well as Kim Plough, Katherine Andrews, Gary Callahan, Mary DeVience, Angela DiBattista, Kim Friedman, Abby Garland, and Sara Strassenreiter for their contributions to editing, design, and production.

For Further ContactIf you would like to discuss this report, please contact one of the authors.

Olivier AbtanPartner and Managing Director BCG Paris +33 1 40 17 10 10 [email protected]

Antonio Achille Partner and Managing Director BCG Milan +39 02 65 59 [email protected]

Jean-Marc BellaïcheSenior Partner and Managing Director BCG New York+1 212 446 2800 [email protected]

Youllee Kim Partner and Managing Director BCG Seoul+822 399 [email protected]

Vincent Lui Partner and Managing Director BCG Hong Kong +852 2506 2111 [email protected]

Amitabh Mall Partner and Managing Director BCG Mumbai +91 22 6749 [email protected]

Antonella Mei-Pochtler Senior Partner and Managing Director BCG Vienna +43 1 537 56 [email protected]

Sarah Willersdorf Principal BCG New York +1 212 446 2800 [email protected]

NOTE TO THE READER

© The Boston Consulting Group, Inc. 2014. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA

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