Opinion: How Can Luxury Brands Prepare For Volatility?


Mario Ortelli | May 19, 2022

Chanel's campaign for its 2022 Cruise collection.Credit: Courtesy.

The events of the past few months alone have shown us just how quickly unforeseen events can shake up global markets. As the luxury industry once again pivots to adjust to the challenges they now face, Luxury Society Columnist Mario Ortelli looks at how brands can best prepare, react and future-proof themselves for volatility.

If the past few years have taught us anything, it’s that today’s world is a volatile and hyperconnected one. When something occurs in one place, it can have a domino effect elsewhere. The kind of volatility that we experience today means that companies need to act fast. Companies and brands have to be very agile in their response to these events, and what’s more, mindful of their actions as each move is extremely visible on the global stage.

When faced with these situations, the first thing companies must work on is securing their top line. For luxury brands, this means building and maintaining a strong relationship with their customers. They can do this in a number of ways, through many different touchpoints such as their sales assistants reaching out through private messaging apps, pushing their advertising and marketing content through their various digital channels, or inviting customers to their marketing events.

Each pathway provides an opportunity for consumers to connect with a brand and reinforces the relationship between the two parties. For instance, when China extended Shanghai’s citywide lockdown recently, luxury brands like Louis Vuitton and Cartier jumped in to provide complimentary meals and desserts to their “very important clients.”

With the numerous closures of supermarkets and restaurants, many residents have struggled to buy food, instead having to rely on sporadic provisions delivered by the government. The provision of food to its top clients was a way to show them that these brands were thinking about them during their challenging moments.

The moves follow similar initiatives seen during earlier days of the pandemic, where VICs of Cartier were invited to an exclusive broadcast that attempted to recreate the experience of a private party held at the Cartier mansion. Originally, these guests would have been invited to an event in real life, but it still gave their customers a way to interact with the brand and connect with them on a new level.

By ensuring that point of contact with the customer and that your company is agile enough to react to these constant changes, these short-term issues can be overcome more effectively. What may be perceived as a challenge, can actually prove to be an opportunity if you know where to push within your business, like the channels you communicate on, the geographies you wish to focus on, and the product categories that you have.

Local Perspectives Are Key

A local perspective is also key when it comes to understanding the nuances in different markets and how to act in times of volatility. While luxury brands must have a clear chain of command, they must also ensure that they listen to a local point of view in these situations. And when they decide to react to the volatility in which they see in their markets, they need to carefully assess and take a decision with those nuances in mind.

Any decision should also be carefully communicated to clients in a way that can be understood by clients so that they do not feel let down. For example, the decision from some luxury brands to stop selling to Russian clients who live outside of Russia was upsetting. Even though the reasons behind the decision was to follow the extensive interpretation of sanctions from governments that have banned the export of luxury goods over 300 euros, and the sale of these goods to individuals who plan to use them in Russia, the message was not properly communicated to their Russian client base.

The upset response from many loyal customers demonstrates just how carefully brands should execute and communicate their actions. Likewise, with the provision of complimentary meals and desserts from luxury brands in China, at a time when the majority of the public is struggling to buy food, these decisions are open to interpretation that a brand must be willing to stand by once set in motion.

It's important to note that these kinds of interactions are not new. Luxury brands have always maintained this level of contact with their top customers. But the context in which they do them has changed. In today’s world, consumer sentiment around a brand can change quickly as everything is shared via social media. What previously might have been just received by a customer, can now be publicly known within seconds of it being posted.

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All Markets Matter

Another point to note is that when times are tough, brands must try to gain market share with their existing customers but also new ones in different markets. With China in an extended lockdown, many brands are looking to the United States as a significant driver for growth. Gucci, Hermès, and Louis Vuitton are opening new stores, strengthening their online presence, and connecting with a new generation of consumers in the United States, where demand for luxury has never hotter and the opportunity represents further growth in the coming years.

But brands must also ensure they never forget a market. They can change the intensity in which they interact with certain markets, but each market is an asset that needs to be invested in for future growth.

Variable Approach To Cost

My last point to note is that luxury brands should try to increase the variable share of their cost base. In the luxury sector, it is usually around 30 to 40 percent of total costs. Brands should be able to invest where it matters, but without over-inflated costs and keeping a margin of flexibility.

In luxury, this is a complex strategy to execute, as in order to create a long lasting relationship with their customers and have defensible competitive advantages, brands have to take on big fixed costs like a retail presence, vertical integration in manufacturing, or an online infrastructure to do so.

But when volatility occurs, luxury brands must be as agile as they can be in their cost base. It becomes a competitive advantage when they are able to react quickly and make the right investments at the right time. As we know all too well, big luxury groups are experts at this. They are able to invest, take risks and protect their top line and therefore their margins.

But when you are a smaller brand, it is more difficult to ensure you are top of mind for consumers, and this means taking a holistic approach in all that you execute. Your products must be top of mind, you must communicate in the channels where your consumers are, you must be even more aware of how volatility affects your business because volatility is embedded in the world of today.

Luxury | Opinion | Retail