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- 18 Feb 2011
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Luxury’s Coming of Age

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In the latest Walpole Yearbook, Walpole’s deputy chairman Guy Salter acknowledges the growing sophistication and openness in the luxury industry but cautions that a faster pace of change is needed

The luxury industry has come through the financial meltdown in good shape, with lower costs and rising revenues. It’s a remarkable achievement. But the world we face is a thoroughly confusing one – a contradictory mix of optimism, worry, boom, decline, austerity measures and structural shifts in markets and consumer behaviour. Yet these needn’t muddle our vision in the year ahead. Here are five areas I suggest we need to focus on now to make sense of it:


1. Country Clever: Making the right growth decisions

Our prospects would look grim without China and the other fast-emerging economies. But however eye-watering the population and growth statistics, many of these markets are tough to get right. Some have structural issues that only the largest brands can afford to put up with until they ease. The crisis demonstrated the need to conserve cash and the dangers of over-expansion. It also reminded us that nothing goes up forever: that’s worth remembering, especially in China. So we need to make careful choices for growth.

There are plenty of other Asian growth markets apart from the mainland. Hong Kong is still a quasi-foreign state as far as the Chinese are concerned. Legally and culturally it is still a much easier place in which to do business and has an undimmed appetite for luxury. Macau registers hardly a blip on most British brands’ radars, despite brimming with mainland Chinese in a mood to spend or drown their sorrows.

Markets like South Korea, Taiwan and Singapore may not be growing at a Chinese pace but still offer respectable growth prospects, as well as a more predictable political and legal climate. Non-Asian markets such as the Middle East and Russia continue to offer opportunities for the right type of brands.

The more mature markets are not without growth prospects. Japan is a hyper-mature luxury market but one that still offers great opportunities for brands that appeal to a deeply discerning customer. And the United States has wrong-footed even the most noted pundits with its rebound in luxury spending.

We all need a China strategy, but how we go about it is important. Ideally, we would all have had the foresight and resources of the pioneers but very few of us have Dunhill’s or Zegna’s impressive positions, built on years of Chinese experience. Most British brands are woefully behind, so many need to look at different models.

There are ways other than immediately opening a costly flagship to get to the wealthy Chinese, such as working with one of the Macau casinos to engage with its customers in Shanghai or Beijing, who are hungry for new ideas, brands and products, or selling to the Chinese when they are travelling outside Greater China. For example, Gieves & Hawkes, who have 92 shops in Greater China, have refurbished their showroom in Savile Row specifically with Chinese visitors in mind.


2. Online: Much to gain and more to learn

Few of us now need to be convinced about e-commerce revenues, but we need to more than just catch up. We have to take online more seriously. Very few luxury brands have inspired, comprehensive, integrated and properly resourced e-business strategies, compared to best-in-class online retailers.

Maybe it’s a generational thing but most luxury CEOs still just don’t seem confident enough to make the bold decisions, hire senior enough people, question what the “digital experts” tell them or insist on standards of service or ease of use that would be second nature in-store. Best practice from other sectors is very useful but we have to go from following to leading if we are to develop real confidence and luxury-specific expertise.

How many luxury businesses really understand how to make money online? Profits can be elusive, both in terms of tracking the metrics and in real terms. It has taken hundreds of years to understand physical retail, from market stall to Ginza superstore. Online is simply different. Once we have a successful shop, we open more. Online requires complex management and growth of an ever-changing elusive group of customers, maximising sales from them and really understanding both the economics and the online dynamics of each order.

We need to get to grips with what social media can do for luxury. Cool-looking iPad apps, Facebook pages or Twitter feeds can be very effective. The trouble is they are often only trophy activities that sound good in the boardroom but deliver little in terms of sales or awareness. Social is so important it needs a proper plan that is measurable and ideally driven from the top by a belief in the business benefits of establishing a significant shift in customer dialogue.

Customer reviews are a case in point. Even though most of us don’t need convincing of the power of peer opinion, luxury brands are so afraid of the spectre of a negative review that we have yet to even experiment with what is increasingly becoming standard practice for non-luxury online retail because it is proven to drive conversion and customer loyalty.


3. Brand: Learning to let go a bit

It was Eric Schmidt of Google who said, “Brands are the Solution… Brands are how you sort out the cesspool [of the internet].” Belief in brand power is hard-wired into luxury businesses. Certainly, if we keep our brands strong, we can’t go too far wrong. The problem is that a traditional command and control strategy is no longer enough.

It can hide problems or inadequacies which make us uncompetitive or slow to change, allowing others, who don’t see the world through our brand eyes, to steal a march on us. Too often it comes with over-concern about “damaging” our brands. Without forward movement, our stories don’t evolve and stay relevant. Above all, this means embracing creativity, not just talking about it. To be significant commercially, creativity means taking risks, thinking sideways and, above all, investing. For example, Hermès’ evolution of Shang Xia, China’s first true blue-blooded luxury brand, is clever commercially and creatively.

Listening carefully is often the key to unlocking a new direction because it can give us confidence or ideas. This is especially true of the Gen Xs and Ys, as we can then use their language to tell our story. The tsunami of bottom-up, widely disseminated opinion about our brands is already sweeping through our barricades. To avoid becoming “Luxury Canutes”, we need to ride the wave.


4. Back Office Luxury: Financial 20-20

One benefit of the crisis was how it led to much higher standards of housekeeping, such as stock management, conserving cash and cost-containment.

The challenge this year will be to retain this lower cost base but do more to understand the financial consequences of our day-to-day business decisions and the back-end benefits of a good e-business plan, such as better inventory management, using the right metrics to monitor costs and profitability and using technologies, especially mobile, that allow customers to find products across stores and online.

One perennially sensitive subject is production and sustaining margins. Linked to this is the question of sourcing and supply, especially of raw materials of the right quality. Nervousness about the subject holds back crucial decisions and leads to muddled brand messages.

A good place to start sorting this out is clarity about a brand’s positioning and business model. As a consumer, I am instinctively drawn to the rare, beautiful and unique. However, the luxury industry is now made up of many different price-points and categories, all of which have business validity. Indeed, those who don’t have clarity will be in significant danger from competitors who do.

Efficiencies don’t all have to come from Asia – even China is getting more expensive as salaries and regulations increase. Prada-like transparency will have to become the norm. What matters primarily is our target product quality and how we communicate that to consumers. Clarity in the business model, a focus on creating financial value and improvements in the supply chain are going to have to become part of Luxury 101 for everyone in 2011.


5. Soft Power: A wider role

Even in France and Italy, where luxury and fashion have long been accorded a cultural and institutional seriousness that the smaller British industry can still only dream of, the sector’s importance isn’t fully appreciated. Why does this matter?

A long time ago, other sectors, whether automotive or mass consumer brands, understood it does matter. A combination of general public goodwill and dialogue with opinion-formers and government is essential to defending oneself against potential threats and creating a favourable climate.

From China to Warsaw, our brands have become cultural icons. We are talked about constantly, especially amongst the young and very young, who use our brands to aspire, to disagree, to measure and to explain. Like it or not, we are part of the fabric of a global contemporary culture. This puts us in the vanguard of the now much talked about “soft power”.

This cultural and creative aspect of what we do needs to be fully recognised. Governments listen hard to thinkers like Richard Florida who stress the crucial importance of the creative sector for Western economies as manufacturing moves eastwards. Luxury is the epitome of commercial creativity but we don’t currently communicate this.

Therefore we have to take a wider view and take more responsibility. As an industry, we are still far behind other sectors in the sophistication and scope of our corporate social responsibility activities. We need to engage with our customers and the wider world.

As an industry, although we need no lessons in promoting our brands, there is a big communications job to do. 2010 saw significant progress, especially with Walpole’s lobbying in Brussels and the creation of the new alliance of the key luxury organisations, so we can speak with one voice. However, there is much more to be done with national governments, especially in Britain and in places like China where political influence is critical.

Luxury’s prospects, both short and long term, look good. The crisis has given us a beneficial shake-up. There will be no shortage of customers but the world we do business in isn’t likely to get any simpler. It is also going to get a lot more competitive. The challenge now is leadership and playing the many good cards we have been given with vision, commercial acumen and a broader sense of responsibility.

Guy Salter, Deputy Chairman, Walpole


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This leader is taken from the Walpole Luxury Yearbook 2011, which has just been published.

www.thewalpole.co.uk