Recently there has been a surge of interest in luxury brands. It is true that they are the polar opposite of low cost: here, the company has complete freedom to fix its prices – as high as possible. How much does a bottle of Royal Salute cost in a Shanghai disco? The answer is s1, 000. This is why financial groups have been set up to relaunch luxury brands – the world number one, LVMH, was born from the talent of its founder, B Arnault, who acquired a fading star, Dior, at a low price. Then he got his hands on Vuitton, now the world’s leading luxury brand in terms of financial value.
But what is luxury? How is it different from premium brands, such as Victoria’s Secret lingerie, Callaway golf clubs, Belvedere vodka or Nespresso coffee? These brands are typical of trading up, as consumers move up the range. Admittedly there is a little of luxury’s ingredients in these brands (better quality, selective distribution, emotive value), but luxury is elsewhere. Let us return to its etymology. The word ‘luxury’ derives from the Latin luxatio, meaning distance: luxury is an enormous distance. There is a discontinuity between premium and luxury.
To return to the essence of luxury, it is customers’ desire to mark their difference. The first luxury manager was King Louis XIV of France. Aristocracy is now dead, but it has been replaced by the power of money. Everywhere in China, in Russia, in the United States and in Dubai, recent fortunes grant more than unlimited purchasing power: they grant power, pure and simple. This is the heart of luxury: giving men and women of power the privileges that accompany it. For power must be shown off in our democratic societies. Once upon a time, the mere name of the noble marked the unbridgeable distance between him or her and an ordinary person. Nowadays, the frontier still exists and it must be marked.
Russian oligarchs, Chinese billionaires and Wall Street’s golden boys do not buy Victoria’s Secret or Belvedere vodka for their partners. They want Dior, la Perla, Elit by Stolichnaya or Krug’s le Clos du Mesnil, which has deposed Dom Perignon. Luxury, like power, is a quest for the absolute.
The luxury business model aims to outgrow this niche in order to exploit the fundamental mechanism described by R Girard: desire born of imitating a model. Luxury brands know how to create more accessible product lines for those who wish to introduce a little luxury into their lives, to enliven their daily grind from time to time. These are luxury’s ‘day trippers’. This created the luxury business.
What does luxury mean to consumers? Luxury can vary as widely as East from West. Everyone can see where it is, but it is constantly on the move. Luxury is relative. For a modest individual, luxury is eating in a good restaurant once a year. For one of the City’s golden boys, it is buying a Ferrari with your annual bonus. For Bill Gates, it is playing tennis with the world number one or buying a Picasso.
Our research has delved more deeply into the notion of luxury among consumers. There are profound differences between people questioned on their concept of luxury. Analysis of the traits that – in their minds – define luxury reveals four concepts of luxury, each with its most representative brand(s) (that is, those that are judged the best example of the type of luxury by interviewees) (Kapferer, 1998).
The first type of luxury, according to this international sample of affluent young executives with high purchasing power, is the closest to the general hierarchy, the average emerging from our studies. It gives prominence to the beauty of the object and the excellence and uniqueness of the product, more so than all the other types. The brand most representative of this type of luxury is Rolls-Royce, but Cartier and Hermès also show these characteristics.
The second concept of luxury in the world exalts creativity, the sensuality of the products. Its luxury ‘prototypes’ are Gucci, Boss and J-P Gaultier. The third vision of luxury values timelessness and international reputation more than any other facets. Its symbols are Porsche, with its immutable design, Vuitton and Dunhill. Finally, the fourth type values the feeling ofrarity attached to the possession and consumption of the brand. In their eyes, the prototype of the brand purchased by the select few is Chivas.
We also find Mercedes in this category:this might seem curious, given the recent diffusion of Mercedes – now more than1, 300, 000 vehicles sold worldwide each year. However, our study dates from 1998, when Mercedes produced only 700, 000 cars per year, and its dynamism and product attractiveness were called into question. This is what led to the revolution we all know about(multiplication of models, introduction of aesthetics, the A class, the M class and soon). Its presence as a symbol of this fourth type of luxury testifies to the brand’s problems. Only a few years ago, its only potential market was among those looking for the luxury, not of a sensory pleasure, but of status, the badge of belonging in a class with money and a desire to flaunt it. We should add, however, that in China, India, Brazil and Russia, it is the very expensive and status-loaded Mercedes S Class that sells. These are de facto inaccessible cars.
Two different approaches to luxury brand building The only real success is commercial, yet there are many roads to this destination. An examination of ‘new luxury’ brands such as RalphLauren, Calvin Klein and DKNY proves that it ispossible to become an overnight success in theluxury market without the long pedigree of aChristian Dior, Chanel or Givenchy. True, these newer brands have not yet demonstrated their ability to endure and survive beyond the death of their founders, but their commercial success is evidence of their attractiveness to customers the world over. We need to distinguish between two different business models for brands.
The first includes brands with a ‘history’ behind them, while the second covers brands that, lacking such a history of their own, have invented a ‘story’ for themselves. It comes as no surprise that these companies are US-based:this young, modern country is a past master in the art of weaving dreams from stories. After all, both Hollywood and Disneyland are American inventions.
Furthermore, the European luxury brands –rooted as they are in a craftsperson-based tradition predicated upon rare, unique pieces of work – place considerable emphasis on the actual product as a factor in their success, while the US brands concentrate much more on merchandising, and the atmosphere and image created by the outlets dedicated to their brand, in the realm of customer contact and distribution.What we see is the creation of dichotomy between ‘history’ and the production the one hand, and ‘stories’ and distribution on the other. Let us examine and compare these two brand and business models in more detail.
The first brand and business model may be represented by the luxury pyramid (see figure below). At the top of the pyramid, there is thegriffe– the creator’s signature engraved on unique work. This explains what it fears most:copies. Brands, on the other hand, particularly fear fakes or counterfeits. The second level is that of luxury brands produced in small series within a workshop: a ‘manufacture’in its etymological sense, which is seen as the sole warrant of a ‘good-facture’.Examples include Hermès, Rolls-Royce andCartier.
The third level is that of streamlined mass production: here we find Dior and YvesSaint Laurent cosmetics, and YSL Diffusion clothes. At this level of industrialization, the brand’s fame generates an aura of intangible added values for expensive and prime quality products, which nonetheless gradually tend to look more and more like the rest of the market. Hence its name equals mass prestige.
In this model, luxury management is base don the interactions between the three levels.The perpetuation of griffes depends on their integration in financial groups that are able to provide the necessary resources for the first level, and on their licensing to industrial groups able to create, launch and distribute worldwide products at the third level (such asP&G, Unleveled and l’Oréal ). Profit accrues at this level, and is the only means to make the huge investments on the griffepay off.
These investments are necessary to recreate the dream around the brand. Reality consumes dreams: the more we buy a luxury brand, the less we dream of it. Hence, somewhat paradoxically, the more a luxury brand gets purchased, the more its aura needs to be permanently recreated.
This is exactly how the LVMH group operates. The model is best explained in the actual words of Bernard Renault, the CEO of LVMH, the world’s leading luxury group, which owns 41 luxury brands. What are the key factors in the success of its brands?
Arnault (2000: p 65) lists them in the following order:product quality;creativity;image;company spirit;a drive to reinvent oneself and to be the best.
The pyramid brand and business model in the luxury market
As we can see, in this pyramid model, wit hits base which expands to feed the brand’s overall cash flow (through licensing, extensions and a less elective distribution system), there must be a constant regeneration of value at the tip. This is where creativity, signature and creator come in, supplying the brand with its artistic inventiveness. Here we are inthe realm of art, not mere styling. Each show is a pure artistic event. Unlike the second brand and business model, itis not a question of presenting clothing which will be worn in a year’s time.
The creativity of the signature label, at the tip of the pyramid, is at the heart of the business model: within a few years of the arrival of John Galliano at Dior, sales had increased four fold. Never before had Diorbeen talked about so much worldwide. Diorwas back at the centre of world artistic creation for women.
The disadvantage of this model – and after all, every model has a disadvantage – is that the more accessible secondary lines are entrusted to other designers, and the further away you move from the tip of the pyramid, the less creativity there is. In this model, there is a strong danger that brand extensions will show little of the creativity of the brand itself:they will merely exploit its name.
The second brand and business model may have originated in the United States, but we should also include the likes of Armani and Boss in this category, which is characterized by its flat, circular, constellation-like model.At the centre is the brand ideal, while all manifestations of the brand (its extensions, licence's, and so on) are around the edge, at amore or less equal distance from the centre.
Consequently, these extensions are all treated with equal care, since each of them brings it sown individual expression of this ideal to its target market. Each portrays the brand in an equally important way, and plays its own part in shaping it. For example, Ralph Lauren’s home textile extension (bed sheets, blankets, tablecloths, bath towels and so on) is complete expression of the patrician East Coast ideal and its values: indeed, the tactic of merchandising the range in the corners of department stores aims to create an idealized reconstruction of a room in a house.
This second model can include brand‘places’ such as The House of Ralph Lauren –superstores which not only stock the entire brand range and its various collections and extensions, but are also specifically designed to give flesh, structure and meaning to the brand ideal. Ralph Lifshitz, Ralph Lauren’s founder, built his brand on an ideal: that of American aristocracy, symbolized by Boston high society. Ralph Lauren’s flagship stores are three-dimensional recreations of this fanciful illusion (Figure below).
The constellation model of luxury brands
It should be noted that ‘pyramid-based’brands face a rather perverse problem. If they create too many accessible extensions, they reduce the profitability of the sales outlets. Ina Chanel boutique, it makes more sense to spend 10 minutes selling a customer a Channel – given the margin it offers – rather than perfume or a product from the ChanelPrecision range. Clearly, the extension policy is inseparable from the distribution policy.
History-based and story-based luxury An examination of luxury brand strategies shows two brand construction models. The first is based on product quality taken to the extreme, the cult of product and heritage, History with a capital H, of which the brand is the modern embodiment. The second is American in origin, and lacking such a history of its own, does not hesitate to invent one.
Ralph Lifshitz became Ralph Lauren, taking on the traits and character of the Great Gatsby, a direct descendant of the ultra-chic Bostonian high society. (See Figure below) These newcomer brands also grasped the importance of the store in creating an atmosphere and a genuine impression, and of making the brand’s values palpable there. America invented Disney and Hollywood – both producers of the imaginary.
The psychology of counterfeiting Counterfeiting is on the increase. It is now global business, involving organized groups, and forming part of Mafia activity as a result of the profits that it offers at the margin of intellectual property and trademark protection laws. It has also found a new distribution channel through the internet and its marketplace sites such as e-Bay. However, if there is a market, there must be customers.
History-based and story-based approaches to luxury
In Asia, the phenomenon relates to local culture. Everyone knows the extent of counterfeiting in China. There is no trademark protection. Traditionally, Chinese culture praises those who share and vilifies people who keep things only for themselves. Faithfully reproducing the master’s work is praised in traditional Chinese education and pedagogy. Furthermore, in the monopolistic economy that dominated the Chinese mentality for 50 years, even the notion of property did not exist, and it was common to see all Chinese factories carrying the same name.
Let us add that only the counterfeits are accessible to local consumers. In these countries, everyone wants to show their neighbors they have finally arrived. Everyone has heard about the Western brands, but very few actually know them: they do not realize they are buying a fake. Research has confirmed this point (Lai and Zaichkowsky, 1999): local consumers choosing a counterfeit or an imitation do so because they are not familiar with the original.
Western consumers know perfectly well which is the original: they play with imitations and counterfeits (McCartney, 2005). Our qualitative research of this phenomenon reveals five motivations:The feeling of getting a bargain, since everyone knows that luxury and Nike products are manufactured in factories in the developing world. These consumers deny the difference in quality between the original and the copy, when they are both produced in China, as is the case for stonecutting products. These are highly discriminating shoppers.
They only buy Quinton ‘identical’ to the original, admiring the quality of the copy: it is this quality, together with the price, that makes it ‘a real bargain’ and enables them to carry the copy every day, under the gaze of friends who will not know the difference. The purchaser of a very good imitation Bulgariwatch, a close semblance to the genuine one she already owns, will not hesitate to give it to one of her children for their 15thbirthday.
Revealingly, purchasers sometimes own true original themselves: this is what qualifies them as experts, and gives status to the copy chosen for its close resemblance.They know what they are talking about.The idea of brightening up functional items: fake Ralph Lauren polo shirts, even if they are approximate copies, are good enough for doing household chores, gardening or washing the car, for example. Certain consumers willingly buy the counterfeit, since they cannot or will not pay the higher price for the original. They find it superfluous or exaggerated to buy aRalph Lauren polo shirt at s60, since they are not strongly involved with the brand.There is also a ‘moral’ motivation among some purchasers of counterfeits: they arescandalised by the price of the original, arguing that since it was manufactured in south-east Asian factory the cost price must be tiny. For these purchasers, it is only right and proper: since this brand is practicing daylight robbery, judging by a comparison of its sales price with its cost price, stealing from it in return is morally justified.An original gift: rather than bringing homea cheap Thai souvenir that will go straight into a drawer, they bring their friends atypical product of the country, a beautiful imitation, a counterfeit that can barely be distinguished from the original.
This present always surprises the recipient, and sparks conversations on the good or bad quality of the counterfeit. Finally, it is certain to be used. However, this type of gift is becoming risky, since European customs consider the traveler who brings home such gifts to be a receiver of stolen goods.
The fight against counterfeiting Counterfeiting is the identical, trait -for -traitimitation of the brand and its identifying components: it is clearly illegal, with no need to prove that the consumer is confused. Perpetrators should be reported and prosecuted. However, longer-term action is necessary in certain countries where it is more than tolerated, even acceptable:Collective action at the level of the Foreign Ministry or Ministry of Justice. This involves inter-state relationships.Collective sensitization efforts, for exam pleat the World Trade Organization (WTO)level, to develop local legal systems.Advertising of the original brand in the country in question. It is necessary tomfooleries people with the ‘true brand’ so that they can distinguish it from the fakes.Advertising on counterfeiting in tourists’countries of origin. Action among Western consumers in their country of origin is educational: they must be reminded that counterfeiting is linked to Mafia group sand laundering drug money. It is also juridical: bringing home a counterfeit makes someone an accomplice and is therefore a crime, punishable by law.
This fight is shifting continually, and requires tact and a highly developed strategic sense. Atypical case is Lacoste v Crocodile Garments. In November 2003, Crocodile Garments announced at a press conference in Hong Kong that it had signed an agreement with the Lacoste shirt brand.
In fact, the Crocodile Garments company had registered a crocodile symbol – a strict imitation of the Lacoste crocodile, but facing to the left instead of the right– in Hong Kong back in the 1970s, and had been exploiting this brand and the ‘Crocodile’s tore chain, not only in Hong Kong but also in Singapore and now in China. With the law on its side, Lacoste took the matter before the relevant courts in Singapore and China. However, although the judgments were always favorable, they remained unheeded on the ground.
In the meantime, hundreds of other counterfeits sprang up in China, including CarteloInternational with over 600 boutiques.Lacoste and Crocodile Garments came to pragmatic and wise agreement. The latter company could see that China was coming under strong pressure from all quarters to respect the WTO’s rules: eventually it would take punitive action against the counterfeiters.
This is why the agreement signed stipulated the cessation of legal action against it, with Crocodile Garments moreover becoming’s licensee in Hong Kong. In exchange, Accosted insisted that the counterfeit crocodile must take a more rounded shape, be contained in a circle and cease to be colored, like the famous original crocodile of1933. By signing this agreement, the two companies formed a common front against hundred other local counterfeiters.