Marketing Strategy: Arcus Outlook on the The New Luxury Consumer
A new sense of discretion in customers who once bought extravagance with pride. When the recession ends, there will be some fundamental changes. The luxury consumer is off the treadmill now. They’re thinking about ‘what do I need, what do I really want?’ For high-end shoppers, the hottest must-have accessory for 2009 is not the 10 carat diamond bracelet or a python leather purse — it’s the plain paper bag. Top luxury marketers note a new sense of discretion. Instead of that coveted shopping bag with an iconic brand name, some are asking for something a little less ostentatious. As the global recession drags on, luxury brands and retailers are contemplating deep price adjustments and are focused on impeccable service to prove their worth. The larger question being asked by luxury marketers is whether a shift away from extravagance might be more permanent with significant consequences on consumption.
Luxury consumer insights
That seems to be the consensus of a recent Wharton panel discussion titled, “Can Luxury Survive the Economy”. In the past, wealthy consumers would buy a product just to get the bag with an up-market label. But profligacy isn’t what it used to be. These days, even the wealthy are feeling pangs of recession. Since the economy has soured, consumers of luxury items have scaled back on their spending and those still shopping are being more discreet. According to some luxury marketers, wealthy customers are asking for plain bags, no boxes, or requesting goods be delivered later. They don’t want everyone to know nor do they want to flaunt their brands. Another study argues 62% of wealthy consumers say openly flaunting wealth is out.
Impact of the global downturn
The global downturn has claimed a high-profile brand in the fashion world. Christian Lacroix, a leading French fashion design house, has filed for protection from creditors citing a drastic drop in demand for luxury goods as the reason, according to the Financial Times.
Sales of luxury goods worldwide could fall by as much as 10% this year, according to some surveys. In the U.S., with a third of all luxury goods sold worldwide, the market is expected to drop by 15%. A recent report states 62% of wealthy consumers say the economy has changed their views on luxury purchases. Some are watching their budget more closely. Others say that flaunting luxury right in uncertain times is insensitive. These consumers would rather help others than spend on themselves.
Luxury at half price
Price-cutting is the new normal for luxury retailers. Some have slashed as much as 70% off designer fashions that usually don’t get marked down until the end of the season. Discounting at luxury department stores made it tough for designers. Given that the price of craftsmanship doesn’t change, a drop in prices can have a significant impact on profitability. For example, Bottega Veneta, the Italian leather house, a subsidiary of the Gucci Group, is famous for their woven leather accessories like handbags, shoes and wallets. The brand saw its sales drop 8.8% in the last quarter of 2008.
Fashion designers are not the only luxury marketers who believe discounting is dangerous. Even restaurants are feeling the heat. The trend is resist a drop in prices, a sign of weakness, and target customers who are willing to spend to keep the integrity of the product they are being offered. Cutting prices could cause long-term problems for a luxury brand. Automotive News reported in April that sales of Maserati, a division of Turin, Italy-based Fiat, slid about 30% in the first quarter of 2009. Most marketers agree that if you drop prices, it’s a big challenge to raise prices again. It isn’t easy to drop prices and add value. A strategy being adopted is to focus on the customer experience and value. For example, a Maserati is hand-built. That’s where the value still is in the luxury business – not downgrading your product, focus on being inspirational.
Downsizing expectations
Some businesses that cater to the luxury market are modifying their products to make them more affordable. For example, restaurant customers are opting for inexpensive wines over cocktails. In response, restaurants may add new items to the menu. Another example of adding to a product line is the ‘baby’ version of the Rolls-Royce Phantom. According to the panel, Rolls-Royce sales dropped about 5% to 174 cars in the first quarter of 2009. The new smaller 200EX Sedan, set to hit the streets in 2010, will come equipped with many of the classic touches of its larger counterpart, but instead of a $400,000 price tag, it will sell for under $300,000. The new version is designed to appeal to existing customers as well as bring in new ones according to Rolls-Royce Motor Cars. They say a lot of owners see the smaller car as their everyday car. Some luxury marketers are offering a smaller version of a standard product, opening up a brand to a different segment.
Aside from trying to bring in new customers, luxury brands are also working harder to please their existing customers with flawless service. The focus is on being perfect, especially when responding to a request, retailers listen more intently. Superior service sets apart luxury brands. Customers will come back for the relationship with their sales associate. Luxury brands are also focusing on their existing customers.
The super-rich are also focused on frugality. Luxury brands are looking for new ways to stay viable. Some luxury retailers on the panel say they have had to cut prices, while others are wooing customers with new, more affordable products. Most argue that any type of discounting and price reduction would permanently hurt their brands. There is a significant shift in focus from glamour to hyping value and superior service.
A permanent shift away from extravagance?
The luxury industry is concerned that there has been a permanent shift away from extravagance. The recovery may happen differently for different types of luxury brands. It may be faster for Restaurants, because they offer a social event. But the recovery might be slower for retailers of luxury apparel and accessories. Consumers are starting to buy a lot less and are more discriminating. And deep discounts at mainstream stores may have permanently changed the perception of high-end retail. Consumers are questioning how much things should really cost more often. They are redefining the balance between the intrinsic value and emotional value of brands and experiences. Is a $5,000 suit really worth $5,000? The trend in discounting has led the customer to ask if these brands were really worth that much in the first place.
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