Luxury Brands Stand Their Ground

Some brands are cutting prices in the face of decline, but those with real style are raising the stakes.

After a decade of unprecedented global demand for luxury, the storm clouds of recession now provide a fascinating backdrop to luxury brand strategy.

Conservative estimates, such as that issued by global management consultant Bain & Co, forecast a drop of 7% in sales of luxury goods in 2009, but others predict much steeper declines before years end.

In the face of this decline, several luxury houses have reduced their prices. Discounting is especially prevalent in the US, where demand has declined the most and a strong dollar has enabled luxury brands to offer significant discounts to consumers while increasing their margins.

Chanel, traditionally a leading force in luxury, sparked the trend in October by cutting its US prices by 7%-10%. 'The dollar's strength has allowed us to pass on greater value to our customers,' said John Galantic, the company's US president. Brands such as Versace and Chloe have followed suit. 'Never before have we done this,' said Ralph Toledano, chief executive of Chloe, which also recently cut wholesale prices by 10% on many items being shipped to the US. 'This is an unusual time. You have to be creative.'

However, Chloe's 'creativity' is seen by others in luxury as a move that could undermine the brand's cachet and hurt sales, as Jean-Marie Laborde, chief executive of luxury drinks group Remy Cointreau has argued. Despite expecting a slowdown to hit his brands in 2009, he remained committed to global price increases. 'We have no intention of giving up price increases, even if we have to suffer in terms of sales or profits,' said Laborde. 'We are targeting for the long-term and our dream is to see our brands at the top end of the pricing category.'

This may strike consumer marketers as illogical, but the art of luxury branding bears little resemblance to the torrid world of fast moving consumer goods. Luxury goods must be the most expensive products in their category, and many have a pathological distaste for rational, demand-based pricing. That the dream of luxury can defy the depression is the philosophy of many traditional luxury brands.

This was the message when Moet & Chandon opened its Atelier on London's Bond Street last Fall. The Champagne house leased the store for just one month to create a space in which consumers could have a bottle of Moet personalized with Swarovski crystals. A 75clbottle set you back pounds 50 - double the high-street price.

A risky strategy? If you believe in price elasticities, rational consumption choices and a worldwide recession, the strategy is certifiable. But if you understand the dream of luxury, it makes sense. Great stars shine brightest when the sky is darkest. In austere times, true luxury brands bestow pleasure, maintain their premium and take a long view.

'We have been around for more than 250 years and have seen tough times before,' said brand director Sally Warmington. 'The Russian occupation of Champagne in 1814 was especially hard, but we survived, and prospered again.' On that occasion, Jean-Remy Moet's cellars were plundered by Cossacks who drank his entire stock. He watched with a smile, and later told friends: 'Those soldiers who are ruining me today will make my fortune tomorrow. I'm letting them drink all they want. They will be hooked and become my best salesmen when they return to their own country.' Now that's how a luxury brand should face a crisis.

Courtesy of Marketing Magazine

Sponsored By: The Brand Positioning Workshop

Comments

[Joy Levin]

There are many interesting consumer dynamics gong on right now with respect to purchasing luxury goods. Some consumers feel guilty about spending on high-end items, and of course, others are fearful about what the future might bring to them. See USA Today from April 30th:

http://www.usatoday.com/money/industries/retail/2009-04-29-luxury-guilt_N.htm

Some marketers are trying to confront this challenge by emphasizing the value of luxury goods - see WSJ from December 2008:

http://online.wsj.com/article/SB122964131538319975.html

Probably a good way to overcome the guilt/fear obstacle, while preserving brand equity.

[B.L.]

It is sometimes convenient to think of luxury brands as high equity brands. This is certainly not true in many cases, and price is merely a small part of brand positioning.

The current recession will without doubt separate the luxury brands that offer true value to their target group from those that are simply overpriced. Exciting times!

[Gabriela Otto]

This is a very interesting point of view. I work in the luxury hotel segment and teach marketing at a University in Brazil. I totally agree with the Chief Executive of Chloe´s about the long-term vision and not decreasing prices during a crisis. It is very difficult to come back to the old pricing level. All luxury segments in Brazil are not growing market share, but are far from losing profit. So, my question is: Don´t you think that this happens in markets most crushed by economic crisis? And companies that adopt this strategy have more "fear" than any other concrete reason?