With the fast-changing needs and tastes of today’s consumers, how would luxury brands keep their products relevant and desirable? In this article, the author sheds light on the dilemmas facing the luxury sector and poses questions accompanying each dilemma, which are designed to help brands as they devise options that will give them more flexibility and versatility during these turbulent times.
Since 1990, the luxury industry has grown spectacularly thanks to brands’ strategic initiatives and the rise of new demand from emerging markets, especially China. But the slowdown of Chinese consumption has exposed the vulnerability of luxury brands across sectors to disruptive change. They are at a crossroads. Digital trends, consumer shifts and new business models have been shaking the traditional paradigm of luxury. And it is still unclear what the next paradigm will look like. In an attempt to gain insights, I interviewed 16 executives from 10 companies in the luxury automobile, fashion, watch and hospitality sectors. I discovered that they are grappling with seven dilemmas, or tensions that require more than either/or decisions. The questions accompanying each dilemma are designed to help executives consider a broader set of complementary options.
Dilemma #1. Targeting customers: Exploring the new vs. exploiting the core
Any good strategy begins by defining what you want to be, and to whom. A current trend is to target millennials – they accounted for 85% of the total growth in the personal luxury market in 2017. In this quest, some houses have revolutionised their collections; but they risk alienating traditional buyers who might no longer identify with the brand and/or the consumers it attracts. Yet, non-millennials represent 55% of the overall market. The industry has also focussed heavily on high-spending Chinese consumers. To close the price gap between China and the rest of the world, most brands have radically inflated their prices in Europe and North America. But these decisions have priced out an increasing proportion of traditional buyers in these countries.
Although it is vital for brands to rejuvenate, executives need to consider the risk of simplistic customer segmentation. For instance, if luxury becomes increasingly irrelevant to Europeans because it is out of reach, it won’t be long before new-market buyers discover that they are no longer buying an aspirational European lifestyle. This could boost the emergence of non-European competitors or open wide the door to substitutes. This is how Prosecco outmanoeuvred Champagne. Over-reliance on one group of customers can be risky: the Swiss watch industry suffered during the recent Chinese downturn for this reason. The first dilemma to reconcile is: How can we rejuvenate our brands without alienating our traditional consumer base? How can we attract new consumers and nurture the traditional ones?[ms-protect-content id=”9932″]
The questions the executives I interviewed have been grappling with are:
• What new segmentation capabilities do we need in order to respond to geographic and generational diversity?
•How can we tailor products and collections and achieve more granular pricing?
• How large should our collections be if we have to accommodate different tastes?
•Should we increase the number of brands again?
•Should we have different stores for different client groups?
•What role can data and analytics play?
Dilemma #2. Building brand awareness: Analogue vs. digital media
At first glance, in the battle between conventional and social media advertising, social media seem bound to win. But brands should be careful not to rush into simplistic decisions. For instance, the CEO of Chronext.com, an online watch marketplace, discovered that TV advertising in Germany paid off more handsomely than investments in Instagram. This came as a surprise, since digital start-ups and TV seem worlds apart. Chronext.com also found that other forms of conventional marketing, such as partnerships with Porsche and Lufthansa business class, were far more effective at building brand awareness than social media. According to new research, luxury brands are losing the battle against mass marketers such as Nike and Adidas because they often overlook the analogue media (such as business newspapers) that future billionaires are reading, or the mass market events such as football matches they are attending. When these people become wealthy, they regard Nike more highly than a luxury brand.
Thus, if luxury strategy requires a combination of analogue and digital media, elite and more mass-market events, the key questions to resolve this dilemma successfully are:
• How do we overcome the limits of generational marketing?
•How do we think complementarity vs. redundancy in our media mix (e.g. becoming sharper on the communication objectives of each medium, whether on or off-line, including type of awareness, trial, repeat, loyalty, image, impulse)?
•When, where and how should we choose one type of media over another so that, overall, we maximise exposure for our target groups?
•What creative campaigns can we run in each media type to make the most of its characteristics?
•If we need multiple tones and ranges, how do we nonetheless have one voice across media?
Dilemma #3. Responding to the need for authenticity: Mystique vs. transparency
Before consumers decide to buy anything, they compare brands that they have become aware of. They might be interested in whether the brand values fit theirs, whether the brand acts sustainably and offers continuity, credibility, integrity and purpose, i.e. is it authentic?
Being authentic means being more transparent about the brand and what it does. But without an aura of secrecy related to artistic creation, luxury loses its magic. Thus, a third dilemma is: How much should we disclose while keeping the mystique of luxury intact?
Associated questions are:
•Should we really continue producing expensive products in low-cost countries not associated with the history of the brand?
•What role can digital influencers and ambassadors play in our strategy?
•How can we relate storytelling to purpose, and what is the future of content?
•In an age of activism, which elements of our value chain should be more transparent and which ones should we protect?
•Should we involve our customers in the anti-counterfeiting battle?
Dilemma #4. Offering innovation: Leading vs. following
Before buying, consumers compare offerings for the product itself. But increasingly, for an equal product, they are also choosing between brands that will give them the most exciting services and experiences.
With a number of brands following street fashion trends to attract millennials and allowing consumers to create their own handbag or scarf via digital apps, luxury has to find the sweet spot between empowering customers around personalisation and experience for greater relevance, on the one hand, and continuing to set the trends of creation on the other. This dilemma is non-trivial. Luxury is an art that has always been about trendsetting, not followership. Losing this status would turn luxury into an expensive but vulgar by-product of commercialism; it would become more vulnerable to disruption. The key question therefore is: How can we follow from the front?
More specific questions are:
•For my organisation, where is the fine line between leading and following?
•What does personalisation mean for our brand?
•Have we been using new digital technologies merely as window dressing or to serve a clear long-term strategy about who we are?
•What are the new experiences we need to create around our products to stand out?
•Should we create those services and experiences on our own or with partners?
•Where should we involve consumers in innovation?
•What supply chain adaptations will we need?
Dilemma #5. Rechannelling distribution: Exclusive vs. inclusive
When purchasing, consumers expect convenience, experience, connectivity and seamlessness. Most luxury brands have come to realise that online channels are here to stay and thrive, even if they do not wish to sell online. In the latter category, Chanel has just announced it will invest in Farfetch to learn about and create better in-store experiences. China offers a window into the future of digital commerce. Moreover, the multiplication of e-commerce distribution channels has demonstrated that shoppers want choice and diversity. They love comparing brands, prices and wide assortments. Suddenly, the multi-brand retail concept is back in fashion, which opens up the opportunity to rethink relationships with physical multi-brand wholesalers as well.
This dilemma is thus about the respective roles, footprints and investments for physical, digital and social channels and how integrated they should be. Also, what role should online and offline multi-brand and new distribution apps and platforms play in the emerging distribution ecosystems? Rather than thinking exclusively about their own stores, brands have to be more inclusive of all the channel opportunities while respecting the core tenet of selectivity.
Specific questions abound, but here are some important ones:
• How can we turn new distribution channels to our advantage?
•How can we reinvent the brick-and-mortar retail experience?
•What training and profile do we need for sales assistants?
•Should the assortment and experience be distinct between channels to make our stores unique destination points?
•What type of technologies and analytics do we need to link online and offline channels?
•How can we use technology and human creativity to enhance the online shopping experience?
•What types of collaborations do we want with our wholesale partners?
•How can we create as much agility offline as online?
Dilemma #6. Strengthening customer loyalty: Brand vs. customer-generated content
What happens after the moment of purchase is increasingly important since it will influence customer loyalty. What customers write, say, film and post on social media will also influence others’ brand awareness. As user-generated content gains more traction, the question is what can brands do with it to create a meaningful post-purchasing experience? This dilemma is about reconciling customer-produced and company-produced content, since the former might not be consistent with the brand’s official communication message.
Thus, the questions to ponder include:
•How can we engage with user-generated content?
•Should we integrate it into our communication and distribution channels? And if so, how?
•How can we mine user-generated content and yet respect the privacy and intimacy of luxury to innovate and create great new experiences?
•Would a digital social platform (à la Porsche) be relevant for us? If, so what would it look like?
Dilemma #7. Designing new organisations: Speed vs. stability
Luxury products and services demand a high level of research, creativity and craftsmanship. The soul of luxury is based on time. High-end brands have to source the best components, which must be sustainable and may not be accessible overnight. For instance, Hermès used to be able to make eight leather belts with one calfskin. Today, due to the acceleration of breeding, it can make only two. So it has to become even more selective in its supply to keep the same quality standards. By definition, the pace of product innovation in luxury cannot be radically fast, nor should it be hurried.
But other economic actors are innovating ever faster, and the culture of immediacy is gaining ground. Consumers judge everything, including luxury brands, by the standards of Amazon, Uber and Zara. Staying insensitive to these shifts seems dangerous. Thus, a final dilemma is: How can we build an organisation that reconciles stability and speed?
This prompts other questions:
•Do we need to follow the trend for the ephemeral? What alternative trend do we want to set?
•Where is speed required?
•Should we use agile methods such as scrums and sprints to develop new products or, on the contrary, should they be deployed for testing in-store and online interactions, and new ideas for loyalty programs, website and app development?
•What type of organisational design will break down silos and increase collaboration and customer-focus to create the seamless cross-channel experiences we need?
•What leadership changes are required? What sort of employee behaviors do we need?
In their haste to embrace digital and new customers luxury brands risk losing their way. Simplistic choices that fail to consider the big picture are risky. In complex and unpredictable times, luxury executives ought to devise options that will give them more flexibility and versatility. What will contemporary luxury strategy look like? One thing is clear: It will mean dilemma reconciliation.
About the Author
Stéphane J.G. Girod is Professor of Strategy and Organizational Design at IMD. Professor Girod’s sectoral expertise is in luxury goods and services, retail, retail banking and consumer goods. He is the program director of the IMD strategy program “Reinventing Luxury: Strategic Conversations” that will take place at IMD on October 10 and 11, 2018.
 According to IMD research, the average sales of the 12 publicly-listed personal luxury good companies has grown six times since 1990, from €2m a year to €12m a year.
 Williams, Robert. “Millennials in $1,400 Gucci Shades Lead Luxury-Goods Revival.” Bloomberg, October 24, 2017.
 “Prosecco: How the Italian sparkling wine knocked Champagne off its pedestal.” Independent¸ May 24, 2017.
 In the 2000s, especially in fashion, many brands killed their entry price brands (e.g. D&G, Versus, Yves Saint Laurent Variation, Kenzo Jungle, etc.). By contrast, Daimler has positioned four brands for different luxury consumers: Mercedes as modern luxury, EQ as progressive luxury, AMH as high-performance luxury and Maybach as utmost luxury. Source: Interview with Bernd Stegman, Daimler Director of Brand and Marketing Strategy.
 Williams, Oliver. “The Case for Mass Marketing: How Non-Luxury is Winning HNWI Consumers.” Luxury Society, March 28, 2017.
 Interview with Patrick Pruniaux, CEO of Ulysse Nardin.
 Kapferer, J.N. “The Artification of Luxury: From Artisans to Artists.” Business Horizon, Iss. 57, No. 3, May 2014.
 Ellison, Jo. “Chanel and Farfetch Team Up to Reshape Luxury Retail Experience.” Financial Times, February 19, 2018.
 For instance, Lamborghini sold 200 cars online at $300,000 in 18 seconds in China. Source: Jean-Claude Biver during IMD Program “Reinventing Luxury: Strategic Conversations,” September 8, 2017.
 Interview with Nathalie Seiler-Hayez, General Manager of the Beau Rivage Palace Lausanne.
 Interview with Arnaud Champenois, SVP Brand and Marketing of Belmond Ltd.
 Interview with the one of the brand’s senior executives.