luxury market.pdf

Luxury Brand Routes to Market: Exclusivity vs Expansion

April 2011

Luxury Goods – Brand Routes

© Euromonitor International

Introduction Luxury Market Overview Routes to Market: Wholesale Routes to Market: Retail Routes to Market: Online Case Study: Polo Ralph Lauren Corp Conclusion

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Luxury Goods – Brand Routes

Introduction

© Euromonitor International

Scope

Luxury Goods

Designer Clothing and Footwear

Luxury Tobacco

Luxury Luxury Jewellery and Accessories Timepieces

Fine Wines/ Champagne and Spirits

Super Premium Beauty and Personal Care

Luxury Travel Goods

Luxury Fine China and Crystal Ware

Luxury Writing Instruments and Stationery

Luxury Electronic Gadgets

Disclaimer

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Much of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors

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Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies’ opinions, reader discretion is advised

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Introduction

Luxury Goods – Brand Routes

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Objectives of the global briefing • The core objective of this report is to examine how the luxury goods industry is responding to the challenge of

widening its distribution within a changing global market at the same time as retaining exclusivity and rarity, key luxury attributes which allow brands to charge premium prices. • The report will look at distribution channels within the global luxury goods market, determining how the latest industry trends and developments are impacting company strategies, and discussing how luxury brands are looking to maintain their premium positioning as well as expand their sales to a wider audience. • The report begins with an overview of the global luxury goods market’s current status and growth expectations to 2015, as well as an overview of retail channels used by the various categories. • The report is then split into three key sections focusing on wholesale distribution, retail distribution and online sales formats, offering an overview of each channel, assessment of its strengths and weaknesses, company strategies and case studies. • A case study looks at the Polo Ralph Lauren company in more depth, investigating its ability to position itself as both a premium luxury brand and a more mid-market label at a time when it is attempting to move to a more premium position in emerging Asian markets, and assessing the future prospects of this strategy. • The report concludes with a series of forward-looking final conclusions, looking at future prospects for distribution channels, and highlighting key strategies going forward. • The report does not claim to be comprehensive but rather seeks to offer high-level insight into key developments and opportunities in the luxury goods market at a time of continued macroeconomic uncertainty. • Data from several Euromonitor International projects have been used in this report: • Luxury Goods • Countries and Consumers • Travel and Tourism • Retailing

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Introduction

Luxury Goods – Brand Routes

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Key findings Global luxury goods: Market environment 2010-2015

Global luxury goods sales have already begun to recover from the impact of the economic downturn, but its effects are still evident. Focus has shifted to the more resilient emerging markets, particularly in Asia, bringing a younger consumer base into greater prominence. Meanwhile, aspirational luxury is out, while high-end classics, which continue to maintain their worth, are popular.

Wholesaling falls out of favour; but for how long?

Bankruptcies, deep discounting and interrupted order cycles all damaged trust between brands and their wholesale customers, leading many brands to refocus on retail activities and place less reliance on wholesale distribution. However, as growth picks up, and internationalisation again becomes a key focus, wholesaling will play a vital part in a brand’s ability to reach consumers.

Brands move to take greater control of retail distribution

As brands such as Hermès and Louis Vuitton safely negotiated the downturn, their strategies of tight distribution control began to be taken up and adapted by more brands. The trend for buying back licences in both developed and emerging markets is still ongoing.

Internet retailing: Luxury brands begin to believe

It required Net-A-Porter to show the way, but luxury brands, particularly within the clothing and accessories categories, are finally looking at online potential.

Flagships vs outlets: Contradictory formats

Are investments in brand image, such as flagships, being neutralised by outlet store activities? This question is not going to go away.

Distribution strategies: Developed markets

Premium store environments are still key to luxury positioning but, increasingly, transactional websites are being used to provide greater accessibility.

Distribution strategies: Emerging markets

As demand expands, accessibility is key, but not at the expense of brand image. In-store and online, support for luxury positioning is a key focus.

Impact of counterfeiting fears on distribution strategies

Restricting sales via third parties and taking back licences are partly about restricting production of counterfeit goods and changing consumer expectations of the type of outlets where they can buy luxury brands. 5

Luxury Goods – Brand Routes

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Introduction Luxury Market Overview Routes to Market: Wholesale Routes to Market: Retail Routes to Market: Online Case Study: Polo Ralph Lauren Corp Conclusion

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Luxury Goods – Brand Routes

Luxury Market Overview

© Euromonitor International

2008 recession launches long-term global shift in luxury sales Luxury Goods: Growth 2005-2007

Luxury Goods: Growth 2008-2010

• Between 2005-2007 sales of luxury goods were

• As the global economic downturn began making an impact

booming in developed markets as well as emerging economies. The Russian and Indian markets showed dramatic expansion, of 65% and 107%, respectively, although India is expanding from a very low base. • Distribution channels were of course key to luxury brands being able to meet this burgeoning demand, across a variety of positionings. Outlet stores, licensing, joint ventures and wholesaling all helped brands to expand their footprint rapidly, alongside retail network growth.

from 2008, the luxury goods market cooled rapidly. This was particularly true in Russia, where growth fell to just 5% over the period, as lower-end consumers began to do without their status pieces and even the most affluent felt the pinch. • China’s progress proved unstoppable however, and as a result, brand attention is being focused ever-more closely there, and on other Asian markets. • Worst hit were aspirational buyers, and as brands began to focus on the more resilient, premium end of the market, having control over a luxury retail environment saw brands building up their retail activities.

Luxury Goods: Sales Growth 2005-2007

Luxury Goods: Sales Growth 2008-2010

Growth Key: 64% 7

Luxury Goods – Brand Routes

Luxury Market Overview

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2011: Has the luxury market recovered? • The luxury market of 2011 still bears the marks of the recent global recession. Two years of declining growth in 2008

and 2009 forced manufacturers and shoppers alike to reconsider their established habits, with luxury brand distribution left struggling to find a happy balance between the two. • 2010 brought better news, with a 4% rebound across the 26 markets that account for 80% of global sales, albeit against a changed market landscape: • “Bling” and aspirational luxury is out, but value, it seems, is only rarely defined by price; brand equity is paramount; • China, India and other emerging markets are firmly established as the focus for growth, while Germany looks set to join Japan in a long-term decline; • The consumer base is becoming younger, driven by a new generation of white-collar workers in emerging markets; • New technologies are changing how consumers approach luxury brands; the influence of the internet and social networking is unavoidable and brands are looking to widen their presence online; • Manufacturer/retailer relationships have lost an element of trust, with more brands migrating to owned stores. • By 2015, the market is expected to have returned to steady growth, with emerging markets accounting for one fifth of global sales. The challenge for luxury brands and retailers alike is to expand distribution to reach these new consumers, using new technologies, without losing the aura of exclusivity that “luxury” depends upon. 300

15

250

10

200

5

150 0

100

-5

50 0

% y-o-y growth

US$ billion

Global Luxury Markets: Developed vs Emerging 2005-2015

-10 2005

2006 2007 2008 2009 Value sales: Developed markets Growth: Developed markets

2010

2011 2012 2013 2014 Value sales: Emerging markets Growth: Emerging markets

2015

8

Luxury Market Overview

Luxury Goods – Brand Routes

© Euromonitor International

Where will the luxury goods market be growing most? • India is forecast to be the standout market in terms of growth to 2015 The country’s luxury goods market is set to

more than double in size over 2010-2015 to generate sales of US$4.3 billion in 2015. This is already attracting luxury brands to the market and premium retail locations are expected to multiply accordingly, but the potential consumer base remains comparatively small. Even the richest 10% of households is expected to enjoy an average income of only US$26,000 by 2015, compared to US$54,000 in China and US$117,000 in Brazil. • By 2015, China will be the fourth largest luxury goods market in the world, having overtaken France, the UK and Italy. Even by emerging market standards, the forecast CAGR of 10% is very healthy: not only does China benefit from an emerging middle class with a rapidly growing earning capacity, but also from a fast-developing luxury distribution network with which to fulfil customer demand. • Nevertheless, while China’s sales are expected to grow by US$6.8 billion to 2015, the massive US market is set to add US$8.1 billion of luxury goods sales. For luxury brands that can rise above the pack in this crowded market, there are still good returns to be made, although US growth will be modest even by developed market standards. 40 80 35 75 70 30 25 20 15 10 5 0 -5

Developed markets: 2010 sales

25 20 15 10 5 0 -5

% CAGR

US$ billion

Top 26 Luxury Markets: Sales 2010 vs Growth 2010-2015

Developed markets: Sales added by 2015 Emerging markets: 2010 sales Emerging markets: Sales added by 2015 Developed markets: Growth 2010/15 Emerging markets: Growth 2010/15 9

Luxury Market Overview

Luxury Goods – Brand Routes

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What will see the most luxury value growth? • Between 2010 and 2015 there are expected to be marked differences in the product selections of luxury consumers

•

•

• •

in emerging and developed markets. In emerging markets, an element of “bling” is still present, with relatively ostentatious products such as luxury jewellery and timepieces and luxury electronic gadgets doing well. As the number of young workers moving out of the family home into one-person or two-person households rises, homewares such as luxury fine china and crystal ware are also a focus. In developed markets, customers - their confidence knocked by the global downturn and the subsequent slow recovery of many developed markets - are expected to favour “classic” goods which will hold their value. Luxury writing instruments and stationery and luxury accessories should both do well, while designer clothing and footwear is seeing a move away from the cheaper, more “aspirational” end of the luxury market to higher-priced statement pieces. Super premium beauty and personal care will maintain steady growth, with skin care products traditionally popular in Asian markets, both developed and emerging. A CAGR of 1% in the US luxury tobacco sales will not be enough to counteract the decline in other developed markets, but tobacco will remain the biggest luxury category in the US and Germany by 2015, joined by China from 2012 onwards. Markets such as Poland and India are also expected to see a rise in luxury tobacco consumption, resulting in strong emerging market growth.

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Value 2010 Growth: Emerging markets

70 14

60 12

50 10

40 8

30 6

4

20 2

10 0

0 -2

% CAGR 2010/15

Luxury Goods – Brand Routes

Luxury electronic gadgets

Luxury writing instruments and stationery

Luxury fine china and crystal ware

Luxury travel goods

Super premium beauty and personal care

Fine wines/champagne and spirits

Luxury jewellery and timepieces

Luxury accessories

Luxury tobacco

Designer clothing and footwear

US$ bn

Luxury Market Overview © Euromonitor International

Luxury goods categories’ differing sales performance Luxury Goods Categories: Sales 2010 versus Developed/Emerging Market Growth 2010/15

Growth: Developed markets 11

Luxury Goods – Brand Routes

Luxury Market Overview

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Which markets will see a contraction in luxury spending? • Japan and Germany are the only two major luxury goods markets forecast to decline over 2010-2015, but compared

to the 2005-2010 period, the rate of the contraction is expected to slow dramatically. Each market has been severely affected by falling sales in one category: luxury tobacco in Germany and designer clothing and footwear in Japan. • Luxury tobacco aside, the German market is expected to do well by developed market standards, forecast a CAGR of 2.5%. Sales of designer clothing and footwear, which also fell during 2005-2010, are expected to be 14% higher by 2015, as the key 25-39 age group takes over from the 40-55 age group as Germany’s highest earners. • Once known as the world’s only luxury mass market, a 2003 study by the Saison Research Institute concluded that 94% of female Tokyo residents owned a Louis Vuitton handbag, even though the country had already endured a decade of recession by then. Consumers are becoming increasingly price sensitive, buying during sales or through outlet stores and mixing expensive pieces with cheaper items, but flat sales, even a degree of growth for several categories, hints that the decline in sales in Japan has bottomed out, and the market has a rump of loyal luxury consumers likely to maintain spending patterns seen in 2010. The Federation of Swiss Watchmakers, for one, noted a positive trend in 2010, with exports to Japan up by 5% on the previous year.

18 16 14 12 10 8 6 4 2 0 2005/10 2010

¥ billion

€ billion

Germany: Luxury Sales By Product Category 2005/10-2015

Luxury tobacco

2011

2012

2013

2014

3,000 2,500 2,000 1,500 1,000 500 0

Japan: Luxury Sales by Product Category 2005/10-2015

Designer clothing and footwear

2015

Designer clothing and footwear Luxury accessories Luxury fine china and crystal ware Luxury tobacco Luxury writing instruments and stationery

Fine wines/champagne and spirits Luxury electronic gadgets Luxury jewellery and timepieces Luxury travel goods Super premium beauty and personal care 12

Luxury Goods – Brand Routes

Luxury Market Overview

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The central dilemma of luxury distribution

Maintaining a luxury brand image and price Using exclusivity to maintain price points and attract highest income consumers Only selling through luxury retail environments; creating premium selling environments (flagship stores) Controlling inventory and brand exposure

The challenge: to remain selective while accessing enough customers and sales. Can the two elements co-exist?

Generating sales in a changing market Widening market coverage Harnessing the sales potential of aspirational consumers Publicising the brand Expanding the customer base Leveraging wholesale activity Creating an online presence

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Luxury Goods – Brand Routes

Luxury Market Overview

© Euromonitor International

Which industries rely on which formats? Category

Key markets

Distribution mix 2011

Designer clothing and footwear

Japan, US, Italy

Department stores, boutiques, owned stores, internet

Fine wines/ Champagne and spirits

Japan, UK, US

Wine specialists, department stores, direct selling, online

Luxury accessories

US, Japan, Italy

Department stores, flagships, owned stores, internet, opticians

Luxury electronic gadgets

China, Japan, Turkey

Owned stores/flagships, department stores, jewellers, duty-free, hotels, online

Luxury fine china and crystal ware

China, France, UK

Department stores

Luxury jewellery and timepieces

US, Japan, France

Jewellers/specialists, department stores, owned stores

Luxury tobacco

US, Germany, China

Specialists, department stores, mail order/online/members clubs

Luxury travel goods

US, Japan, China

Owned stores, department stores, duty-free, hotels, online

Luxury writing instruments and stationery

US, Japan, China

Department stores, owned stores, specialists, online

Super premium beauty and personal care

US, China, UK

Department stores, owned stores, duty-free, online

Age restrictions complicate online sales for this category, but an international customer base and the relatively transportable nature of the product both suit the format. Mail order wine clubs, specialist sellers and direct sales from vineyards are making a smooth transition to e-commerce. When it comes to wholesale doors, exclusivity is key in this channel. In 2009-2010, Cartier withdrew from 40% of its US wholesale distributors in order to prevent overstock issues. Declining numbers of department stores in some key markets, particularly Japan and the US, has been a major issue for super premium brands. Branded boutiques, duty-free environments and wooing influential bloggers have helped to replace concessioncounter “face time”. 14

Luxury Goods – Brand Routes

Luxury Market Overview

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Luxury’s shifting business model for 2011 and the short term DOS

Flagship Licensed stores stores

Third party Department Branded Third party boutiques stores websites online

Outlet stores

Exclusivity Premium brand image Selling to high-income consumers Maintaining price strategies Driving volume sales Anti-counterfeit Selling to aspirational consumers Resilient to recession High growth potential Suited to developed markets Suited to emerging markets Cost implications Obstacle

Driver 15

Luxury Goods – Brand Routes

© Euromonitor International

Introduction Luxury Market Overview Routes to Market: Wholesale Routes to Market: Retail Routes to Market: Online Case Study: Polo Ralph Lauren Corp Conclusion

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Luxury Goods – Brand Routes

Routes to Market: Wholesale

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Routes to market: Wholesale formats

• Traditional formats: Department stores, boutiques

• Emerging formats: Outlet stores, eboutiques • Many luxury brands moved away from wholesaling during the recession as retailers began implementing steep discounts. • The once-key department store channel is suffering a decline so luxury brands are wise to explore other options. • Outlet stores, factory shops and online boutiques such as Net-APorter offer growth at both the lower and upper ends of the luxury market.

Distribution managed in-house

• Traditional formats: Company owned/franchised branded stores

• Emerging formats: Brand websites, social networks • Company owned/franchised stores allow brands to control pricing, but as luxury’s international consumer base widens, their contribution to creating and maintaining a brand image may be even more crucial. • Websites and social networking presence are increasingly recognised as another important brand imaging tool, with the potential to bring new consumers into stores.

• Definition: Sales

Internet Retail

through third party distributors

• Definition:

Retail

Wholesale

• Definition: Sales

transactions are completed online. Can operate as both a retail and wholesale distribution channel

• Traditional formats: Websites operated by established retailers such as department stores, wine clubs; fashion e-boutiques

• Emerging formats: Transactional branded websites, luxury outlet e-stores, mcommerce, iPad applications, social networking • The use of websites as brand showcases is relatively well established, but the internet is only now gathering momentum as a luxury distribution channel.

Definitions are for the purposes of this report. Company-specific definitions may vary 17

Luxury Goods – Brand Routes

Routes to Market: Wholesale

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Luxury wholesale: Risk and rewards Luxury wholesale: The good

Luxury wholesale: The bad

• Luxury wholesaling - selling goods to

•

Wider market exposure Performance measure alongside competitors

Unpredictable purchase patterns

Cost-effective expansion

Unwanted discounting

Spreading risk

Brand over-exposure/Loss of exclusivity

Prestige stores enhance brand image

Counterfeiting issues

•

•

•

third parties rather than controlling all distribution in-house - has become less attractive to luxury brands since the recession hit. Third party retailers became less reliable as customers because of bankruptcies and cautious buying in the wake of the downturn, while deep discounting programmes caused widespread damage to brand pricing. Counterfeit goods are harder to control for brands which are known to use wholesale distribution. In addition, the decline of the aspirational luxury market has left brands more reliant on the top end of the market, meaning that brand image, exclusivity and sales environments grew in importance. However, using wholesale distribution gives luxury brands access to a much wider consumer base without requiring major investment, and presence at the very best stores can enhance a brand’s image, or even add a fresh dimension to it. 18

Routes to Market: Wholesale

Luxury Goods – Brand Routes

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Growth in US and China props up department stores channel • The department stores channel saw steep sales falls in 2007-2009 as non-grocery sales were hit by the credit •

• •

•

crunch, before bouncing back to 4.5% in 2010, led by China and a resurgent US market. In the US, the merger of the Federated and May department store groups in 2005 had already resulted in a number of store closures before the downturn resulted in deep discounting and several bankruptcies: a distribution problem for luxury brands. Nearly 20% of Japan’s department stores have closed over 2005-2010, but the channel remains an important outlet for luxury brands, many of which operate their own shops within department stores. Top luxury department store banners such as Isetan, Mitsukoshi and Takashimaya all saw sales declines of 4-5% in 2010 on the back of years of negative growth. With department store sales expected to fall by another 14% to 2015, luxury brands will be forced to explore other distribution avenues. Chinese department store numbers are growing rapidly as chains expand into smaller cities, but in the saturated first-tier markets, it is demand for luxury products that is pushing sales higher.

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Luxury Goods – Brand Routes

Routes to Market: Wholesale

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Department store channel: Store numbers vs value sales Department Stores: Value Sales 2005-2010

Department Stores: Outlet Numbers 2005-2010 US$ billion (constant 2010 prices, fixed 2010 exchange rates)

25

Japan 20

US Outlets

15

10

UK

China 5 Russia

0 2005

2006

2007

2008

2009

2010

500 450 400 Japan 350

South Korea

300 250

US

200 150 UK

100

China

50 0 2005

2006

2007

2008

2009

2010

Japan Singapore South Korea Australia Saudi Arabia UAE Canada US France Germany Italy Portugal Spain Sweden Switzerland UK China India Malaysia Poland Russia Brazil Mexico South Africa Turkey 20

Luxury Goods – Brand Routes

Routes to Market: Wholesale

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Super premium department stores avoid credit crunch pain

% y-o-y growth

Super Premium Department Stores vs Overall Channel Growth 2005-2010 UK

• Super premium department stores rose above

30

Harrods

20

Liberty

10

Fortnum & Mason

0

-10 2005-6

•

Total department stores channel 2006-7

2007-8

2008-9

2009-10

•

% y-o-y growth

France 5

Le Bon Marché

0

Total department stores channel

-5

-10 2005-6

•

2006-7

2007-8

2008-9

•

2009-10

% y-o-y growth

Russia 40 20 0 -20 -40 -60 2005-6

GUM Bolshoy Gostiny • Dvor Total department stores channel 2006-7

2007-8

2008-9

2009-10

recessionary pressures in 2007-2010, even in hard-hit markets such as the UK and Russia. Before the recession, many of these stores had been seeing growth on a par with, or even below, the overall department stores channel, making their strong performance during the global economic downturn even more remarkable. The very high incomes enjoyed by the customer base of these super premium retailers may have seen some impact from the global recession, but luxury products remained easily affordable. “[US$10 million in liquid assets] is a level of wealth where people feel protected from the hazards of the world.” Milton Pedraza, Chief Executive of the Luxury Institute However, the downturn made some consumers re-assess their attitudes to luxury purchases, resulting in less conspicuous consumption and even delayed purchases for a time, but in 2010 this sense of purchasing “penance” was already fading. Longer term, the focus of luxury consumers in developed markets is expected to shift towards luxury experiences rather than luxury possessions; an area that top department stores must work to exploit.

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Routes to Market: Wholesale

Luxury Goods – Brand Routes

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Currency fluctuations influence luxury retail destinations • Luxury retail is an international business; consumers do not consider themselves tied to

•

•

•

Exchange rate index January 2011

•

their domestic markets. The fluctuating currency rates of the past 2-3 years have played their part in shaping luxury retail, with destinations such as London benefiting from an influx of visiting consumers taking advantage of the weak pound. High-profile department stores have benefited, and have tailored their marketing campaigns accordingly; brand flagships - designed to enhance brand image abroad as well as to generate sales - have also been developed with foreign consumers in mind. The strong yen has been bad news for Japan’s beleaguered department stores; not only has it reduced the buying power of visiting tourists, but rises in the consumer price index led to Japanese shoppers visiting other markets in Asia for their luxury shopping. During 2009, when exchange rates peaked at won16 to the Japanese yen, almost double 2008 figures, the number of Japanese visitors to South Korea rose by nearly a third. Major department stores hired Japanese-speaking assistants to take advantage of the influx. Chinese consumers have also become a significant force in developed luxury markets, estimated to account for 30% of all luxury goods sales in the UK, for example. China’s high import duties make luxury prices overseas even more attractive.

Harvey Nichols, London: launched its “Tourist” campaign in mid-2009, featuring foreign language advertisements

Purchasing Power: How Exchange Rates Are Affecting Luxury Consumers' Ability to Buy. Exchange Rate Index (July 2008 = 100) 250 200 150 100 50 0

Chinese consumers Japanese consumers European consumers US/UAE/Saudi consumers Russian consumers British consumers X signifies domestic buying power, calculated using the Index of Item Prices 22

Luxury Goods – Brand Routes

Routes to Market: Wholesale

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Western department stores head east in search of sales Moving east

• Faced with sluggish or declining home markets,

• Harvey Nichols (UK): International expansion began in

2000 with entry into Saudi Arabia (Riyadh); to date there • are stores in Hong Kong, Ireland (Dublin), the United Arab Emirates (Dubai), Turkey (Istanbul, Ankara) and Indonesia (Jakarta). • Bloomingdales (US): High-end New York retailer opened its first overseas store in Dubai in February 2010. • • Saks Fifth Avenue (US): Licensed stores now located in Saudi Arabia (Riyadh, Jeddah), United Arab Emirates (Dubai), Mexico (Mexico City), Bahrain (Manama) • Galeries Lafayette (France): Germany (Berlin), United Arab Emirates (Dubai)

Looking eastwards

•

• Harvey Nichols has two new stores planned, in Hong Kong • • •

•

(2011) and Kuwait (2012). • Three of London’s most renowned single-outlet department stores have indicated they may open overseas stores: Harrods, recently acquired by Qatar Holdings, is now considering entry into China, with a store in Shanghai; Fortnum & Mason has confirmed that international • expansion is being looked at; likely locations are China, the Gulf States and, longer term, India; Liberty was rumoured to be investigating internationalisation using money from the sales and leaseback of its iconic London store in 2009: no plans have yet been announced.

department stores in developed regions are now looking overseas for further growth potential. Countries such as the Gulf states, where there is already an established base of luxury consumers but where the department stores channel is less saturated, have been a popular destination; Dubai in the United Arab Emirates and Riyadh in Saudi Arabia in particular. Moves into other developed markets, such as Selfridges’ entry into Ireland, have become a rarity. Galeries Lafayette does still operate the Berlin store that it opened in 1995, but its attempt to enter the US market failed. Similarly, Japanese banner Mitsukoshi exited Germany, France and Spain during 2009-2010. Now even the most august names in department store retailing - Liberty, Fortnum & Mason and Harrods - may be about to move beyond their single-store model. For Harrods, in particular, store expansion involves an additional layer of risk. As one of the world’s leading super premium department stores, it caters to a highly cosmopolitan, international consumer base that sees few difficulties in travelling to London to shop. Industry commentators have pointed out that a second flagship, located in Shanghai, could damage Harrods’ air of exclusivity and, while it might attract more shoppers of a lower income level, the move might not find favour with the very richest consumers. 23

Luxury Goods – Brand Routes

Routes to Market: Wholesale

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Eastern department stores make progress in China • There is an undeniable interest in the high-growth Chinese

East to east • Mitsukoshi (Japan) still operates a store in both Italy

and the US, but is now focused on expansion in Asia, particularly Taiwan (18 stores) and China (Shanghai). • • Isetan (Japan) expanded into Singapore in 1971, and now has stores in Thailand, Malaysia, Taiwan and China. • Lotte Group (South Korea) signed a joint venture with Intime which resulted in the Intime Lotte Department Store opening in Beijing, but it recently revealed that it • will be opening some 20 of its own stores by 2018. • Central Retail Corp (Thailand) launched its first Chinese department store in 2010; more are planned.

U-turns • Mitsukoshi (Japan) - expanded into a number of

European markets during the 1970s, but withdrew from Germany (3 stores), France (1 store) and Spain • (1 store) in 2009-2010. The Hong Kong store was closed in 2006 after 25 years; although it was not an official market exit, no new store has replaced it. • Saks Fifth Avenue (US) had planned to enter the Chinese market with a store in Shanghai’s upmarket • Bund district, but plans reportedly lost momentum as a result of the economic downturn. The site is now occupied by House of Roosevelt, a massive wine merchant/members club/restaurant concept store.

economy from Western luxury department stores, but so far it is other Asian department store banners that have made inroads into the market. Despite the closure of two underperforming Isetan stores and occasional flare-ups of anti-Japanese sentiment, China remains a key focus of owner Isetan-Mitsukoshi’s expansion plans. The remaining Mitsukoshi stores in Europe and the US seem increasingly peripheral to the company’s plans. Saks Fifth Avenue is arguably the Western banner that has come closest to entry into China. It signed a licensing agreement with Roosevelt China Investments Corp in 2006 to develop stores in China and Macau. However, the first store, due to be opened at a high-profile site in Shanghai, never launched; thwarted, reportedly, by the economic downturn, though the subsequent launch of the high-end House of Roosevelt on the site suggested that Shanghai’s luxury market still had room to grow. US-based Saks might be better off focusing on expansion in nearby Latin America. It is already present in Mexico, where the luxury goods market is forecast to grow by 26% to 2015, but Brazil, where 20% growth to 2015 will add US$1.4 billion to the market, arguably offers even stronger prospects. In contrast, the Chinese market could be a good direction for Australian department stores David Jones or Myer to move in; geographically closer than most other first world chains, they also have experience of Chinese consumers, who currently make up over 3% of Australia’s population. 24

Luxury Goods – Brand Routes

Routes to Market: Wholesale

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Putting luxury online: Neiman Marcus, US • Compared to the rest of the luxury industry, US premium department stores have been some of the earliest adopters

of internet retailing, and online sales are becoming an increasingly important part of their business model. • Neiman Marcus launched neimanmarcus.com in October 1999, but although long-standing exposure to remote sales through its mail order catalogues made the transition a logical one for both retailer and consumer, the migration online has led to a marked uptick in the importance of non-store activities to overall group sales. • Between 1995 and 2000, the percentage of sales generated by the Direct Marketing division drifted down slightly albeit remaining at around 13%. By 2005, the trend had reversed; non-store sales accounted for nearer 16%, by 2010 nearer 19%. By then, online sales were generating the lion’s share of non-store revenues, making up 16% of all Neiman Marcus Inc’s sales. Throughout the economic crisis, the Direct Marketing division proved more resilient than Neiman Marcus Group’s store-based operations; slower to go into negative growth during the downturn than storebased sales, and quicker to recover. • Neiman Marcus’ stable of websites have been operating within a relatively sparse competitive environment, but as more of the luxury brands it features develop their own e-commerce capabilities, competition will increase. The company has been strengthening its luxury and fashion credentials, most recently with the launch of fashion blog NMdaily in March 2011, but - luxury industry or not - the leveraging of more prosaic positives, such as the option to collect-in-store and return products to store, could be even more important to long-term growth.

Neiman Marcus: Store-Based vs Non-Store Sales Q1/06 - Q1/11 20% % growth

10% 0% -10%

-20% -30% Q1 06

Q2 06

Q3 06

Q4 06

Q1 07

Q2 07

Q3 07

Q4 07

Q1 08

Speciality retail stores

Q2 08

Q3 08

Q4 08

Q1 09

Q2 09

Q3 09

Q4 09

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Direct Marketing division 25

Luxury Goods – Brand Routes

Routes to Market: Wholesale

© Euromonitor International

Department store outlets vs full-line stores: Nordstrom, US

30 20

80 Stores

• Outlet offshoots are not a new development for department stores,

10 40 0 0

-10

-40

-20 Store numbers

% y-o-y sales growth

120

Nordstrom Inc: Nordstrom Rack Store Numbers and Sales Growth 2005-2011

80

20 10

0

0

-10

-40

-20

% y-o-y sales growth

30

Stores

120

Store numbers Note: * planned stores

•

Same store sales growth

Nordstrom Inc: Full-Line Stores Store Numbers and Sales Growth 2005-2011

40

•

Same store sales growth

•

•

but their profile was certainly raised during the recent economic downturn. Nordstrom Inc was particularly active in terms of network expansion, adding 20 outlet stores, which it operates under the banner of Nordstrom Rack, between 2008-2010, compared to just six full-line stores. Nordstrom Racks are used to clear surplus stock from the full-line stores, but they also buy products directly from manufacturers. As the number of Nordstrom Rack outlets increases, it may become harder to maintain the perception that its product mix is closely related to the full-line stores, leading to a loss of cachet for the Rack brand. Like rival Neiman Marcus outlet banner Last Call, Nordstrom Rack launched its e-commerce site in October 2010. This enables Nordstrom Rack to tap into a wider consumer base, but again, increases the pressure on its ability to offer desirable, brand name goods at large discounts and runs the risk of the Nordstrom name being associated with discount, rather than premium, retailing. The fewer-frills approach of a Nordstrom Rack outlet compared to a full-line store may keep operational costs down, but the performance of both the Nordstrom Rack stores and the existing full-line stores are affected by the profile and image of the premium store portfolio, and will suffer if this is allowed to dwindle. The strategy of prioritising Rack stores over full-line outlet expansion looks set to carry on unabated during 2011, with 18 Nordstrom Rack openings planned for the year compared to just three new full-line stores. However, same store sales growth for full-line stores has now returned to positive territory; in 2012, it could be time for Nordstrom Inc to prioritise its full-line stores once more. 26

Routes to Market: Wholesale

Luxury Goods – Brand Routes

© Euromonitor International

Third party boutiques: Help or hindrance? • Attitudes of luxury brands towards multi-brand boutiques run by third •

•

•

•

•

party retailers vary. Some brands, such as Louis Vuitton, Hermès and Tod’s, avoid this route completely, preferring to maintain full control over their distribution by using stores that are either fully owned, controlled via franchise agreements or department store concessions. This strategy also makes it harder for counterfeiters to sell goods; if it is not sold through one of their own, branded stores, it is not an authentic product. Other brands are available through third party boutiques, particularly smaller or newer operations which lack the resources for a wide distribution network of their own. The recent economic downturn saw deep discounts being offered by third party retailers desperate to get rid of unsold stock, making it very difficult for brands to maintain price points elsewhere. Bain & Co highlighted markdowns as a key factor in its estimate of an 8% fall in Q4/2008. The brands then suffered a double impact, as retailers were cautious about buying more stock, resulting in a subsequent dip in wholesale orders. This forced many brands to reassess their relationships with third party stores and even franchise partners. Control has become a higher priority; shifting to more owned stores (Polo Ralph Lauren), buying up franchise partners (Hugo Boss, Burberry) and rejecting third party retailers whose store environments do not support the brand positioning (Cartier). As luxury sales recover, and growth targets for brand manufacturers become more ambitious, third party retailers will rise in importance. Brands need to remember the lessons learned as their strategies for dealing with third party stores develop.

Third party boutiques: Pros Widens geographic reach with minimum investment from luxury brand owner Premium boutique environments can add cachet, and have the potential to be used to improve/update positioning if desired Accesses different consumer base to brand boutiques

Third party boutiques: Cons Less control over pricing Less control over stock levels/ordering cycles Less control over brand image Third party retailing can provide cover for counterfeit goods Less potential to use instore experience as a pro-active marketing opportunity 27

Luxury Goods – Brand Routes

Routes to Market: Wholesale

© Euromonitor International

Boutique case study: House of Roosevelt, Shanghai USP: Hybrid format in high-profile site catering to a variety of consumer bases within the fast-growing Shanghai market.

Key point: An ambitious large-scale format for a fast-growing emerging market but having to attract a wide range of customers in order to pay its way could damage its luxury credentials. Is a clearer positioning needed?

Key facts: • Launched: September 2010 • Owner: Roosevelt China Investments Corp • Located in the former Jardine Matheson HQ, a prestigious

A prestige environment for luxury brands?

building in Shanghai’s exclusive Bund district. In 2008, it was • The market for fine wines/champagne and spirits in planned to be the location of the first Saks Fifth Avenue China has tripled over 2005-2010, and is expected department store in China, but the economic downturn forced to double again over 2010-2015. By 2015, the Saks to rethink its plans. market will be worth US$1.2 billion, which House of • House of Roosevelt is an unusual hybrid format: featuring a Roosevelt is clearly hoping to tap into. 1,000 sq m Rolex store on the ground floor as well as a • This boutique benefits from a premium location with brasserie where dishes cost from US$10, a wine “cellar” on the a lengthy history, which has given it an instant first floor, an elite members club on the second floor complete “heritage” factor. The owners have put much effort with dedicated cigar lounge (a 3-year membership costs into creating several premium environments for its RMB180,000 (US$27,000)), and a restaurant and high-end premium clients and premium products, but the roof-top bar on the eighth and ninth floors targeted at wide clientele that the concept targets makes a Shanghai’s “fashionista” crowd; other levels are still being luxury positioning harder to sustain. renovated. • House of Roosevelt would benefit from further • The 1,100 sq m Wine Cellar offers over 20,000 bottles of wine support for its upmarket positioning, for example at prices ranging from RMB65 to RMB500,000 (US$10the presence of more luxury brand boutiques to US$74,500). A “secret” cellar behind a sliding shelf contains stand alongside Rolex. super premium products. 28

Luxury Goods – Brand Routes

Routes to Market: Wholesale

© Euromonitor International

Boutique case study: Colette, Paris USP: Achingly hip boutique which has built an international reputation through its mix of luxury products and street-style brands across a variety of price points. Essentially, Colette sells style, rather than products.

Key point: Colette covers a wide price range, but the concept has a clear positioning in terms of the style-savvy customer it targets. The weakness in its business model comes from the reliance on its founders, who still control the selection of products. No further stores are planned, and even the current store could struggle to maintain its profile if it changed ownership.

Key facts:

A prestige environment for luxury brands?

• Launched in March 1997 by mother-and-daughter team

• Colette’s regular updating of its in-store range puts any

Colette Roussaux and Sarah Lerfel. • Located at 213 Rue Saint-Honoré, in a district of Paris known for its fashion and luxury offer. • Collette comprises of three floors covering 740 sq m. The ground floor offers streetwear labels, as well as gifts, gadgets and CDs; upstairs is devoted to luxury clothing by both established brands and cutting edge emerging designers while the lower level is a fashionable bar, which only serves water (over 100 kinds). The store also regularly hosts exhibitions by artists and designers. • Colette is also known for its exclusive collaborations with fashion designers and other celebrities; it was also recently chosen as one of only four outlets in the world to stock US apparel market leader Gap’s collaboration with Valentino.

brand on its shelves firmly “on trend”; a valuable attribute even for established luxury brands. • However, the Colette product range is perhaps so special that it is difficult for brands to stand out, which may explain the number of exclusive collaborations that the store is able to garner, not to mention other initiatives such as limited-time shop-in-shops. • Colette has even managed to transfer some of its unique cachet online, with the help of numerous blogs, and should benefit from its international reputation though, as in the store, relatively few customers will be able to afford the fashion on offer. • However, does Colette risk becoming a victim of its own success if its reputation begins to attract too many “ordinary” visitors, diluting the “street” atmosphere? 29

Luxury Goods – Brand Routes

© Euromonitor International

Introduction Luxury Market Overview Routes to Market: Wholesale Routes to Market: Retail Routes to Market: Online Case Study: Polo Ralph Lauren Corp Conclusion

30

Luxury Goods – Brand Routes

Routes to Market: Retail

© Euromonitor International

Routes to market: Retail formats

• Traditional formats: Department stores, boutiques

• Emerging formats: Outlet stores, eboutiques • Many luxury brands moved away from wholesaling during the recession as retailers began implementing steep discounts. • The once-key department store channel is suffering a decline so luxury brands are wise to explore other options. • Outlet stores, factory shops and online boutiques such as Net-APorter offer growth at both the lower and upper ends of the luxury market.

Distribution managed in-house

• Traditional formats: Company owned/ franchised branded stores

• Emerging formats: Brand websites, social networks • Company owned/ franchised stores allow brands to control pricing, but as luxury’s international consumer base widens, their contribution to creating and maintaining a brand image may be even more crucial. • Websites and social networking presence are increasingly recognised as another important brand imaging tool, with the potential to bring new consumers into stores.

• Definition: Sales

Internet Retail

through third party distributors

• Definition:

Retail

Wholesale

• Definition: Sales

transactions are completed online. Can operate as both a retail and wholesale distribution channel

• Traditional formats: Websites operated by established retailers such as department stores, wine clubs; fashion e-boutiques

• Emerging formats: Transactional branded websites, luxury outlet e-stores, mcommerce, iPad applications, social networking • The use of websites as brand showcases is relatively well established, but the internet is only now gathering momentum as a luxury distribution channel.

Definitions are for the purposes of this report. Company-specific definitions may vary 31

Luxury Goods – Brand Routes

Routes to Market: Retail

© Euromonitor International

Luxury retail: Risk and rewards • There has been a shift towards retail sales, where

Luxury retail: The good

Luxury retail: The bad •

Direct customer contact

•

•

•

•

distribution is controlled by the company itself, in recent years; even to the extent of some brands buying up franchised stores. The ability to retain control over pricing has been an important element of this, after deep discounting by third party retailers in the wake of the economic downturn damaged some wholesale relationships. Having closed between 120-140 wholesale accounts in the US that it felt were underperforming, Cartier, for example, was able to prioritise its own stores, and better support wholesale retailers that were performing strongly and supporting brand positioning. Controlling its own stores also gives companies more control over brand image and direct contact with consumers. Several brands have recently also taken control of distribution in the Chinese market which should help to differentiate the label within an increasingly competitive market. Large-scale expansion remains difficult for brands bearing all the set up and running costs themselves, but the internet is now widening options for international sales, not only through transactional websites but also through initiatives such as live catwalk streaming and social networking sites.

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Luxury Goods – Brand Routes

Routes to Market: Retail

© Euromonitor International

Shift to owned stores keeps brands close to consumers • Wholesale revenues are now widely reported to be improving

• 2009 was a bad year for wholesale luxury

(though this may in part be due to greater control over distribution, with massive drops in sales posted by inventory levels and pricing by brands), but the shift towards some of the leading luxury groups; a development directly-operated stores is still evident. that looks even worse when viewed alongside a much more positive growth trend for company• A secondary trend during 2009-2010 was the appearance of controlled retail activity. more flagship stores, from Burberry’s high-tech Beijing store to Louis Vuitton’s Maison London. The value of these stores • Better store environments and avoidance of is to promote the brand to both domestic and overseas discounting were some of the reasons for retail’s consumers, as much, if not more, than any effect on sales. stronger performance, along with the ongoing expansion of company-controlled store networks. • Obvious benefits of directly-operated stores include greater control over store environment and pricing, higher margins • Luxury brands were hit by a fall in wholesale orders, on sales and less vulnerability to weak retail partners. They made worse in some cases by stock being withheld also give brands more control over their image, and foster from wholesale customers considered to be risky, and restrictions on inventory at third party retailers in customer relationships through face-to-face contact; factors which will become more important as online selling grows. order to maintain exclusivity and limit discounting.

Wholesale vs Retail Growth 2009

“The best communication vehicle we have is the stores.” Patrizio di Marco, President and CEO, Gucci

% y-o-y growth

20 10 0 -10 -20 -30 Prada (YE January 2010)* * wholesale figures include 35 franchised stores/2009

Polo Ralph Lauren (YE April 2010) Retail

Hugo Boss (YE December 2009) Wholesale

“Louis Vuitton and Hermès control their distribution channel from A to Z and they don’t discount.” Milton Pedraza, Chief Executive of the Luxury Institute 33

Routes to Market: Retail

Luxury Goods – Brand Routes

© Euromonitor International

Flagship stores support high-end luxury positioning • Luxury brand flagship stores formed another clear trend in 2010,

Major flagship openings in 2010:

mainly driven by brands’ need to re-emphasise their high-end • London, May: Louis Vuitton’s new Maison in positioning and target the more resilient super-rich market. prestigious New Bond Street opens its doors. • Rents and occupation levels at the best retail locations remained • Milan, September: Jimmy Choo’s new flagship stable during the downturn, but many retail development projects features its first European VIP room. were put on hold. This limited the number of suitable mall-based locations for premium brands, and made them more aggressive • Beijing, October: Emporio Armani unveils 5storey, 1,600 sq m site. about securing good standalone sites. • New York, October: Ralph Lauren opens flagship • Flagships complement another current trend, of offering in-store for womenswear and home collections. experiences in order to add value of the brand in consumers’ eyes. The Gucci Artisan Tour, for example, which sets up in-store • Hong Kong, November: Cartier replaces 40-yearold store with a much-enlarged flagship. workshops so customers can see the detail that goes into the products, will be finishing at the brand’s Fifth Avenue, New York, • Beijing, November: Hublot’s first standalone flagship store in April 2011. flagship in China. • Despite the headline growth of the Chinese market, many of • Paris, November: Hermès opens a new home 2010’s flagship openings were in developed regions. However, market flagship, but with an eye on tourist spend. impressing and attracting overseas customers is an important • New York, December: Dior reopens its 57th part of the function of such stores, particularly as many Chinese Street flagship after extensive renovations. visitors prefer to buy abroad in order to avoid high luxury taxes. • London, December: New Bond Street welcomes • In the future, flagships may not always be physical stores, as the another flagship: accessories brand Mulberry. launch of the Gucci.com “digital flagship” demonstrates. • “The more we elevate our stores and the merchandise mix, the stronger the customer response.” Polo Ralph Lauren, Q3/2011 • “Success of upscale positioning strategy.” One reason given by Gucci for a strong rise in fiscal 2010 sales • “Sharp turnaround in profitability fuelled by Couture.” YSL accounts for a 13% rise in fiscal 2010 revenues • "We will invest more in turning old stores into flagship-style stores in the next five years rather than opening up new stores, because you need to keep Fendi really in the high end.” Fendi CEO Michael Burke, 2009 34

Luxury Goods – Brand Routes

Routes to Market: Retail

© Euromonitor International

Capturing the consumer: Luxury retail in travel locations • Opening stores in away-from-home locations,

Tourism Flows vs Expenditure on Shopping 2008-2010

% growth in tourist expenditure on shopping 2008-2010

such as travel environments, gives luxury China brands the opportunity to target luxury 60 Hong Kong, CN consumers at a time when they are likely to India have time on their hands, are likely to be Japan looking for gifting purchases and there are Malaysia fewer non-retail distractions. Singapore 40 • Duty-free areas are the obvious example, and South Korea these locations offer some very distinct, Australia advantages. They distil the luxury potential of Poland an airport’s catchment area, by providing a Russia single location - free of taxes - that almost all 20 Brazil luxury consumers must pass through if they Mexico travel. Moreover, they can operate separately Saudi Arabia from the market where they are geographically South Africa located. UAE 0 • Leading global drinks company Diageo has Canada 0 20 40 60 80 100 120 140 tapped into this in Dubai, first by offering one-toUSA one tasting sessions for its most luxury brands, France and then by opening Emporium, a luxury Germany cocktail bar/retail concept store in December Italy -20 2010, in association with Moët Hennessy. Norway Portugal • The Middle East is seen as a region with Spain untapped potential for luxury alcohol sales, but Sweden there are issues over religious sensitivities. As -40 Switzerland Dubai Airports CEO Paul Griffiths pointed out Departures + arrivals 2010 (million trips) UK however, “We see the airport environment as Bubble size represents tourist expenditure on shopping 2010 separate and distinct from the local market.” 35

Routes to Market: Retail

Luxury Goods – Brand Routes

© Euromonitor International

The original luxury store location: High-end hotels • Top hotels offer a captive audience of high-income consumers, which

•

•

•

•

•

Expenditure on Luxury Hotels as a Percentage of Total Expenditure on Hotels 2008/2010

have long attracted luxury brands. Hotel retail offers brands insight into the tastes and preferences of a very tightly-targeted demographic. Like duty-free areas, they are also able to exist apart from the local economic and retail environment, because, by definition, luxury hotels UAE already provide the right demographic of high-earning individuals. Mexico USA Hotels such as The Peninsula in Hong Kong (est. 1928) created some Hong Kong, CN of the earliest versions of luxury malls; the shopping arcade in The Australia Peninsula still house over 80 shops, including Louis Vuitton, Chanel Portugal and Prada. Brazil Sweden In emerging markets, high-end hotels are still key locations for luxury South Korea brand retail, partly because of the way they target HNWIs, but also Singapore because they represent safe, secure and luxurious retail Switzerland Spain environments, which may otherwise be in short supply. India India is a typical example: it is viewed as one of the highest potential Russia luxury markets in the world, but the lack of luxury retail malls has Saudi Arabia prevented brands from expanding as fast as they would like. Luxury Italy UK malls only appeared in the Indian market in 2008, and are still only South Africa present in the very largest cities: the DLF Emporio in Delhi, UB City in Poland Bangalore and Palladium in Mumbai. However, 35% of hotel spend is Germany in luxury grade accommodation, and as luxury brands look to widen Turkey Canada their presence in other cities, premium hotels remain one of their few Malaysia store location options. Japan Combining the elements of luxury hotels with duty-free retail, luxury China cruise liner passengers are perhaps the ultimate captive luxury France audience. Here too, luxury brands have looked for retail opportunities: 0 the Mayfair shopping arcade on Cunard’s latest luxury liner, the Queen Mary 2, includes Hermès and Chopard stores.

2008 2010

25 50 75 % of total expenditure

100 36

Luxury Goods – Brand Routes

Routes to Market: Retail

© Euromonitor International

A threat to exclusivity? Designer outlet malls • The outlet mall format was first developed in the US in the

• •

•

•

•

100

Number of outlets

•

1970s, spread to Europe and Japan in the early 1990s and has now begun to appear in emerging markets such as China, Mexico and Malaysia. There are now several operators that focus on the luxury end of the market, though even in designer outlet malls, highstreet banners will be present alongside luxury brands. Luxury brands that are very active within designer outlet centres include Polo Ralph Lauren, Hugo Boss and Burberry. In its most recent results announcement however, Burberry stated that growth in its mainline stores had substantially outperformed outlet sales; in part because of “the deliberate strategy on our part of having less inventory flowing to outlets”. Brands such as Burberry, whose 46 outlets constitute around 10% of its retail stores, need to provide a significant amount of merchandise to stock these low price formats. As brands focus on full-price merchandise and exclusivity in the wake of the economic downturn, rather than the aspirational customer base, low-price formats like outlet malls could fall out of favour. Other luxury brands are only present in a small number of outlet malls, simply to clear out excess stock; for these, online members shopping clubs could provide a viable alternative. However, outlet malls also offer some strong positives for luxury brands: offloading excess stock in a relatively controlled environment; providing a reliable sales channel without the expense of a luxury retail environment; and combating counterfeiting by offering a lower-cost branded option for aspirational consumers.

80

Key Premium Outlet Centre Operators US/Europe/Other 2010 32

60 40 20 0

58

11 9 19

11

US Europe Other Tanger Factory Outlet Centers Inc (Tanger Outlets) Simon Property Group Inc (Premium Outlets) Neinver SA (Factory, The Style) Value Retail Plc (Chic Outlet Shopping) McArthurGlen Group (Designer Outlet) Source: Company information • Simon Property Group’s Premium Outlets brand

has been the most vigorous in terms of international expansion; now present in Japan, South Korea and Mexico and due to launch in Malaysia in 2011. • As more outlet malls expand into emerging markets, affluent areas with high tourist flows will be key sites. • Tourists are a major consumer group (double-digit growth achieved by Chic Outlet Shopping in Q3 2010, for example, was generated by an 81% increase in tax-refunded sales during the period). • Nevertheless, premium outlet centre operators tend to be very regionally orientated, despite their international customer base.

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Luxury Goods – Brand Routes

© Euromonitor International

Introduction Luxury Market Overview Routes to Market: Wholesale Routes to Market: Retail Routes to Market: Online Case Study: Polo Ralph Lauren Corp Conclusion

38

Luxury Goods – Brand Routes

Routes to Market: Online

© Euromonitor International

Routes to market: Online formats • Definition: Sales

• Definition:

Department stores, boutiques

• Emerging formats: Outlet stores, eboutiques • Many luxury brands moved away from wholesaling during the recession as retailers began implementing steep discounts. • The once-key department store channel is suffering a decline so luxury brands are wise to explore other options. • Outlet stores, factory shops and online boutiques such as Net-APorter offer growth at both the lower and upper ends of the luxury market.

• Traditional formats: Company owned/ franchised branded stores

• Emerging formats: Brand websites, social networks • Company owned/ franchised stores allow brands to control pricing, but as luxury’s international consumer base widens, their contribution to creating and maintaining a brand image may be even more crucial. • Websites and social networking presence are increasingly recognised as another important brand imaging tool, with the potential to bring new consumers into stores.

Internet Retail

• Traditional formats:

Distribution managed in-house

Retail

Wholesale

through third party distributors

• Definition: Sales transactions are completed online. Can operate as both a retail and wholesale distribution channel

• Traditional formats: Websites operated by established retailers such as department stores, wine clubs; fashion e-boutiques

• Emerging formats: Transactional branded websites, luxury outlet e-stores, mcommerce, iPad applications, social networking • The use of websites as brand showcases is relatively well-established, but the internet is only now gathering momentum as a luxury distribution channel.

Definitions are for the purposes of this report. Company-specific definitions may vary 39

Routes to Market: Online

Luxury Goods – Brand Routes

© Euromonitor International

Luxury brand transactional websites: Risk and rewards • Questions over whether luxury goods

Luxury online: The good Attracts boutique-shy customers

Luxury online: The bad

could be successfully sold online have largely been answered by the success of sites such as Net-A-Porter and the growth being seen by department stores for their online activities. • The internet’s potential to showcase brands is already being explored; for some categories, such as fine wines and jewellery, informative websites can help to dispel “boutique fear”, helping new customers (particularly in emerging markets) to discuss prospective purchases more knowledgeably. • For brands which suffer badly from counterfeiting, such as Louis Vuitton, the internet allows them to sell to more customers without ceding control of any of the distribution or bearing the expense of a multitude of new stores, but internet sales via third parties could equally lead to a rise in counterfeiting. • For luxury brands, the decision to sell via their own, branded, website, is a difficult one. Can the channel provide enough of a luxury level experience to maintain price levels in the long term? 40

Routes to Market: Online

Luxury Goods – Brand Routes

© Euromonitor International

Website profile by category highlights online inconsistencies • The online presence of luxury brands varies by product category, but over the past decade there has been a

significant move online, even if only to showcase a luxury brand to a wider audience. • Designer clothing and footwear has been the most progressive in terms of online selling, inspired by the example of Net-A-Porter, with luxury accessories and now beauty and personal care gaining momentum. • Companies, such as Tiffany & Co and luxury wine clubs such as The Wine Society, which have already sold via mail order, have made a natural migration to e-sales, even within categories with an otherwise limited online presence. • Luxury mobile phone and watch brands selling online are still surprisingly rare. Although they have tech-savvy customers, store-only sales (or a personal visit by a representative) lend an aura of exclusivity for these high-price items.

Key:

Few brandoperated websites

Websites used as brand showcases

Transactional websites common

Designer clothing and footwear Fine wines/Champagne and spirits Luxury accessories Luxury electronic gadgets

Luxury fine china and crystal ware Luxury jewellery and timepieces Luxury tobacco Luxury travel goods

Luxury writing instruments and stationery Super premium beauty and personal care 41

Routes to Market: Online

Luxury Goods – Brand Routes

© Euromonitor International

Key event: Net-A-Porter paves the way for online luxury Internet retailing was seen as the home of 140 discount brands and 120.0 bargain hunters and 120 Net-A-Porter 100 81.5 launched just as the 80 internet bubble burst Sales (£ million) 55.2 60 in 2000; but sales 36.5 figures have proved 40 21.3 to the world that full11.8 20 price luxury fashion 0 can be sold online. 2005 2006 2007 2008 2009 2010 The luxury industry has taken note. Source: Trade publications, company information

Net-A-Porter Annual Sales 2005-2010

Net-A-Porter history • Launched in 2000 by industry insider

Natalie Massanet; she sold her stake to Richemont Group in 2010, in a deal valuing the company at £350 million, but remains as executive chairman. • An upmarket, fashion magazine-style web environment allied with luxurious boxand-bow packaging as standard helped the site improve e-commerce’s image. • Discount sister-site theoutnet.com launched in 2009, and menswear site MrPorter.com in 2011.

Future prospects: Will Net-A-Porter be a victim of its own success? • Net-A-Porter has established itself as a leader in website execution,

and is still driving development through initiatives such as its iPad app. • This should “future proof” the business model, but by demonstrating the potential of luxury online retail, Net-A-Porter led to countless luxury brands launching their own sites, many with e-commerce facilities in place, or planned. As brands’ determination to control their own online A rigorously edited product range has distribution increases, Net-A-Porter could find premium stock and been key to Net-A-Porter’s success, and exclusive editions harder to negotiate. the exclusive products that this powerful • Acquisition by the Richemont Group should enhance the site’s ability to site can now command, such as the above expand, but could lead to brands owned by rival groups withdrawing collaboration with Burberry Prorsum, their products, particularly once they have developed alternative enhance its cachet still further. internet retailing capabilities. Long term, this could lead to a decline.

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Luxury Goods – Brand Routes

Routes to Market: Online

© Euromonitor International

E-commerce finally comes into fashion 1999

Tiffany

2000

Ralph Lauren •

2001 2002

• Despite some powerful luxury brands launching online stores relatively early, it

Hermès, Gucci

2003 2004 •

2005

Louis Vuitton, Dior

2006

Marni

2007

Boucheron, Armani, De Beers, Rolex

2008

Emilio Pucci, Valentino, Hugo Boss

2009

Kenzo, Roberto Cavalli, Ferragamo, Donna Karan, Dunhill, Balenciaga, D&G, Fabergé, Fred, Jil Sander, Versace, Loewe, Moschino •

2010

Bulgari, Alberta Ferreti, Cartier, Ermengildo Zegna, Lacoste, Maison Martin • Margiela, Prada, Stella McCartney, Marc Jacobs

•

•

was during 2009 and 2010, that the internet retailing trend really hit the designer clothing and footwear industry, with a slew of brands opening their first e-boutiques. This was partly an effect of the economic downturn, which interrupted normal revenue cycles and make luxury brands eager to access a wider consumer base, for example in second- and third-tier locations in both developed and emerging markets, without devaluing the brand by allowing it to be stocked in lower-quality retailers or bearing the expense of new stores. However, there were also other factors which demonstrated that full-price luxury products could be sold successfully online, particularly the success of Net-APorter and announcements such as Hermès’ confirmation that 5% of its sales were generated through the internet. As more brands launched e-stores, more of their competitors decided not to get left behind. Although e-boutiques are still very much a developed-market channel, with only a few brands, for example Armani, moving into more challenging markets such as China, online luxury retailing is expected to see long-term growth, as brands use it to access new markets. In order to attract customers, particularly for full-price sales, brand image must be carefully maintained, which fits well with the current trend of luxury brands taking more direct control of their retail distribution and the vogue for high-profile flagship stores. Lack of fact-to-face interaction may however make it more difficult for brands to track and anticipate customer demand (and also conflicts with the current vogue for “experiential” marketing); expect to see more brands exploring the potential of social networking to build alternative relationships with consumers. There remain some notable exceptions: Chanel and Fendi still do not sell online, though others, such as Tom Ford and Chloé, have taken the halfway step of using their web pages to direct customers third party sites selling the brand.

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Luxury Goods – Brand Routes

Routes to Market: Online

© Euromonitor International

Case study: Gucci raises the stakes with “digital flagship” • Gucci was a relatively early adopter of e-

commerce, launching its first transactional website in 2002. However, in 2010, it raised the importance of its online activity by branding its newly-relaunched website as its “digital flagship”. • Online luxury is still largely a developed market trend, making the digital flagship a sound strategy for the Gucci brand, which derived 61% of its sales in Q4 2010 from North America, Western Europe and Japan. • The digital flagship strategy is also part of Gucci owner PPR’s strategy of increasing its control over distribution channels, including the internet. By offering a high-performance, widely available transactional website, Gucci’s reliance on third party e-tailers is reduced. • The third strand of the strategy is the digital flagship’s relationship with Gucci’s other nonstore endeavours, such as social networking and m-commerce.

• In a flagship store, by definition, every aspect of a brand’s image

•

• •

•

•

and execution should be as perfect as possible. Gucci’s strategy for this online “flagship” has been to not only enhance the shopping experience, but also to knit all the elements of the brand image seamlessly together. The e-boutique is of a very high standard. Products benefit from sharp images presented stylishly (handbags are ranged on virtual shelves, while clothing is presented catwalk-style), and the full breadth of Gucci’s range is available, from handbags to necklaces to dog collars to baby-gros. Viewing any item offers visitors the opportunity to “Love it”, share it with friends via Twitter, Facebook or email, or consult with an online personal shopper. The geographic reach (US, Canada and 10 European countries) is very extensive by luxury brand standards. Gucci is now one of the leading brands on Facebook with 3.8 million “likes”, has a healthy 45,000 followers on Twitter, and has also developed applications for the iPhone/iPad. Gucci’s free iPhone app has now been downloaded over 800,000. It was created to showcase the “World of Gucci”, but also ties in with current campaigns: a recent update included a children’s dress-up module to tie in with the brand’s recent launch of its children’s collection. “Gucci Connect”, meanwhile, gave users exclusive access to the 17 January 2011 Milan catwalk show. Moves such as this have made Gucci one of the most accessible luxury brands online, but the strategy goes further. By launching iPhone and iPad apps at a time when these items are still somewhat above mass market, Gucci is targeting an ideal luxury consumer group of higher-income, tech-savvy shoppers.

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Routes to Market: Online

© Euromonitor International

Big potential in social networking - but approach with caution Format

Key moment

Progress

Potential

Bloggers

Coach was one of the few luxury brands to tap into the blogger community, creating buzz for the launch of Poppy.

The most successful blogs are beginning to professionalise, making them better vehicles for brands, but many others are failing to invest enough effort.

Bloggers interact with consumers on a very personal level, making them a tool that luxury brands should look at using more as internet retailing cuts into “face-time” with customers.

Facebook

Burberry passes four million “likes”, Gucci close behind.

More brands are setting up on Facebook, but not all are investing enough in their pages. A poorly designed site creates a negative impression for consumers.

The introduction of transactional sales to Facebook is a major advance, but brands need to make sure it accesses their target demographic, and have a coping strategy for when Facebook’s popularity wanes.

Twitter

@DKNY, tweets from an unnamed PR girl at the brand, has over 275,000 followers.

A few brands have established Twitter followings (eg Bergdorf Goodman and Oscar de la Renta); absent brands (eg Chanel) are at risk of copycats.

These successful Twitter accounts, although quite personal in tone, are also anonymous, making them easier for a business to sustain long term. Site profile outside the US still limited.

YouTube

Chanel releases its Scorsese-directed Chanel Bleu commercial on YouTube.

YouTube has provided a handy platform for video content such as commercials and catwalk shows, but can lack the personal touch.

Can be hard to control the other clips that show up alongside a brand. As more brands upgrade their websites to include digital content, YouTube’s popularity could fade.

Other SN sites

Catchachoo campaign (Jimmy Choo) - locating a free pair of trainers using FourSquare.com.

Hermès, LVMH and Burberry have set up their own social network-style sites, but initial success is hard to sustain.

Enhancing Facebook pages, or using another established site, seems a more practical option for a brand than creating a new social networking site. 45

Routes to Market: Online

Luxury Goods – Brand Routes

© Euromonitor International

Members’ online shopping clubs: Sample sales for all • Online private shopping clubs, selling designer brands through limited time sales to registered members, are a

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•

Sales

•

growing phenomenon. Maintaining the aura of exclusivity by requiring customers to be site members (often by invitation only), and adding buzz and excitement by offering products for only a limited time such as 36-48 hours, this format does much to replicate an existing element of the luxury business: sample sales. For luxury brands, these private member sites can act as a useful way in which to shift even quite large amounts of surplus stock over a short time period, limiting the impact on the brand’s other distribution channels, on pricing levels and on the brand’s image. Online members clubs remain largely geared towards designer clothing and footwear and luxury accessories, though many sites are now branching out into categories such as homewares, jewellery and watches and even holidays. In fact, this format would be suitable for most luxury categories, and the need to maintain a constant flow of top brand sales in the face of increasing competition means that sites will continue to diversify. Other categories are also seeing the arrival of their own, dedicated, private shopping clubs, such as SommelierCellar, launched in November 2010. The site offers wines selected by two of the UK’s top sommeliers, in sales lasting up to two weeks. The original private shopping club was vente-privee, which Vente-Privee: launched in France in 2001. The vente-privee business model Sales and Productivity 2006-2011 has now been copied by many other sites in Europe and the US 1,000 60 including cocosa.com, Rue La La and Gilt Groupe. Although many of these sites are achieving rapid growth, there 40 are some signs that the model is under strain. Vente-privee still 500 relies on France for 82% of sales, despite four years of operation 20 in Germany and Spain and two years in the UK and Italy; since 2006, the number of items sold in each sale has fallen by 55%. 0 0 2006 2007 2008 2009 2010 2011 A relaxation of vente-privee’s membership requirements - since target 2010, new members can register without needing to be referred Sales (€ million) Products sold (million) by an existing member - indicates that slowing growth is a Number of sales ('00) concern.

•

Products sold per sale ('000)

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Routes to Market: Online

Luxury Goods – Brand Routes

© Euromonitor International

Can discount sites supply true luxury? • Discount sites offering truly high-end luxury brands •

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•

•

are few and far between. In the US, for example, although some of the discount offshoots launched by premium department stores now have their own transactional websites, the selection of top brands is far outweighed by the sale sections of the main brand. This may be because there is less stigma attached to being a sale item at a full-price store, than featuring on a more “end of line” site. For a discount site offering a consistent selection of top luxury brands, there are few that can compete with theoutnet.com which, like its parent site Net-APorter, is forging a path in luxury retailing that conventional wisdom said was not possible. Although theoutnet.com offers international delivery and styling advice, it has dropped some of the Net-APorter extras, such as the magazine-style luxury reportage. Instead, it creates buzz with a much more immediate, impulse-driven approach, with time limited “Pop up”, and “Going going gone” sales, and a monthly giveaway of a top item, dear to the frugalista fashionista’s heart. Thanks in part to its connection with Net-A-Porter, theoutnet’s mix of top luxury brands and designer collaborations is strong enough that presence on this discount site does not devalue a brand; but it is not easy to see how other sites could copy this model.

Oscar de la Renta on the website of high-end US department store Neiman Marcus (100+ items)

Oscar de la Renta on Neimanmarcus.com’s sale pages (36 items, biggest discount: 65%)

Oscar de la Renta on Neiman Marcus Last Call, an outlet division (3 items , biggest discount: 55%)

Oscar de la Renta on theoutnet.com (12 items, biggest discount: 65%) 47

Routes to Market: Online

Luxury Goods – Brand Routes

© Euromonitor International

Faking it: Luxury fights back against online counterfeiters • For luxury brands, the biggest downside to the internet is how well the channel lends itself to selling counterfeit

goods. Counterfeits are frequently available online, where websites which often have authentic-sounding names such as www.tiffany-discount.com, and through auction sites such as eBay in Europe and the US and China’s Taobao.cn. • Louis Vuitton and Tiffany, both early adopters of internet retail, have led the way in aggressively pursuing auction sites that host sales of counterfeit goods, particularly eBay, winning a number of court cases against the company in the European courts. Charges included allowing sales by unauthorised sellers and allowing key word searches on brands without their permission, as well as allowing sales of fake goods, and fines have mounted up into millions of euros. However, success is not guaranteed: in November 2010, Tiffany finally lost a long-running case against eBay when the US Supreme Court ruled that eBay was not responsible for trademark infringement by individual sellers, and that it was enough if the site simple removed auctions of counterfeit goods. • Trade bodies are also involved in fighting sales of counterfeit products: the Federation of Swiss Watchmakers has been a vigorous opponent of online fraud, setting up a dedicated unit to combat the problem. In 2010, it negotiated the cancellation of over 300,000 auctions of fake watches. • China remains a major source of counterfeits, despite a number of government initiatives to tackle the issue. Although a move by China’s eBay equivalent, Taobao, which has recently launched a major crackdown and threatened to delist sellers found offering fake goods, is a positive one, it will not solve the problem. • As luxury brands attempt to widen their market coverage and make more use of online sales, online sales of counterfeit goods will become a bigger and bigger issue. Long term, the only real solution may be to change consumer perception of fake goods, making buyers more aware of what distinguishes a fake product from the real thing, and making it less socially acceptable to flaunt a “knock off” product. • Sites such as www.replicaswisswatch.com, launched by the Federation of Swiss Watchmakers in late 2010, are designed for precisely this purpose. Visitors to the site can browse through a selection of watches for 30 seconds, but are then moved to a page with a strong anti-counterfeiting message. 48

Luxury Goods – Brand Routes

© Euromonitor International

Introduction Luxury Market Overview Routes to Market: Wholesale Routes to Market: Retail Routes to Market: Online Case Study: Polo Ralph Lauren Corp Conclusion

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Luxury Goods – Brand Routes

Case Study: Polo Ralph Lauren Corp

© Euromonitor International

Polo Ralph Lauren: One brand’s approach to luxury distribution

Maintaining a luxury brand image and price Using exclusivity to maintain price points and attract highest income consumers Restricting sales of the most premium labels to branded stores, not wholesale doors Widening network of retail and ultra premium flagship stores

Polo Ralph Lauren Corp: Can premium brands continue to co-exist with outlet store operations as company attempts to move the brand upmarket in Asia?

Generating sales in developed and emerging markets Widespread use of outlet stores to access aspirational consumers Expanding the customer base via wholesale doors across a variety of positionings

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Case Study: Polo Ralph Lauren Corp

Luxury Goods – Brand Routes

© Euromonitor International

Polo Ralph Lauren: Managing the brand • The Polo/Ralph Lauren brands have been stretched to an incredible

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•

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•

•

extent. Pricewise, they range from the super premium Ralph Lauren Purple Label collection (shirts from US$395) to the entry-level Rugby by Ralph Lauren brand (shirts from US$59.50). This strategy widens the customer base but could put the brands at risk of the overexposure which has so damaged the likes of Burberry and Gucci in the past. However, the PRL brands have the advantage of comparatively discreet branding, which should protect them from the worst excesses of overuse and counterfeiting. Just over half its revenues in 2010 were generated through wholesale sales, mainly via department stores, in North America, Europe and Japan. PRL’s biggest wholesale customer in 2010, accounting for 18% of the division’s sales, was the Macy’s department store, indicating that, in wholesale terms, PRL is positioned as an upper-mid-market, rather than premium, brand. PRL manufactures exclusive ranges for firmly mid-market chains such as Kohl’s and JC Penney, but it is noticeable that these lines - Chap’s and American Living, respectively - do not have an explicit connection to the core brand: Ralph by Ralph Lauren, sold at the more upmarket Dillard’s chain, is the only exclusive line to use the Lauren name. The company’s retail positioning is even more varied. Of the 350 standalone stores that PRL operates directly, nine are flagships and 170 are full-price stores, under the premium Ralph Lauren and upmarket Club Monaco banners, but 171 are outlets, selling heavily discounted overstock and past-season products. Despite the company’s statement that “our full-price retail stores reinforce the luxury image and distinct sensibility of our brands”, during fiscal 2010, the number of full-price stores in PRL’s key US market was reduced, while the number of outlets was increased.

Premium retail formats Purple Label Ralph Lauren Women RRL

Pink Pony

Black Label

RLX

Polo Ralph Lauren Club Monaco Blue Label (women) Ralph Lauren brand variants

Other brands

Ralph by Ralph Lauren Rugby Lauren for Men Polo Jeans Co Lauren by Ralph Lauren

Chaps American Living

Various brands, especially Lauren by Ralph Lauren, Polo Outlet stores Sold only via PRL retail stores

Sold through wholesale formats 51

Luxury Goods – Brand Routes

Case Study: Polo Ralph Lauren Corp

© Euromonitor International

Retail investments target repositioning for long-term profit… • PRL’s current focus is on expanding its retail activities, even though they are apparently less profitable than its

wholesaling division, which contributed over half the company’s sales in fiscal 2010 and nearly two thirds of operating income. This may make the shift towards retail appear counter-intuitive, but the company is bargaining on it being the key to long-term growth. • Because PRL’s wholesale revenues are wholly dependent on developed markets, and heavily reliant on the beleaguered department stores channel, not only were wholesale revenues hard hit by the economic crisis, falling by 8% (US$217 million) in fiscal 2010, and slower to recover than the retail side in the first 9 months of fiscal 2011, but the division is also badly positioned to tap into the strong growth forecast for emerging markets to 2015 and beyond. • The other region with a significant PRL presence is Asia Pacific. Until 2008, PRL relied mainly on licensed partners to run its Asian stores. However, brand development in the region became increasingly out of step with the global Lauren image, and the company has now bought back the licences in order to operate stores in the region directly and rebuild brand equity. If successful, PRL will get the full benefit of rising sales in this dynamic market. • However, although this move will boost sales income, heavy investment in both store refurbishment and relocation will be needed if PRL is to move the Lauren brand’s positioning upmarket, which will have an impact on the division’s profit levels into the short to medium term. Expanding store networks, store refurbishments and flagship launches are other ongoing expenses that the company will have to bear long term in order to support its retail activities.

Polo Ralph Lauren: Revenue Breakdown Fiscal 2010

Wholesale, 51%

Source: Company reports

Retail , 46%

Polo Ralph Lauren: Operating Income Breakdown Fiscal 2010

Retail, 27% Wholesale, 62%

Licensing, 11%

Licensing, 4% Source: Company reports 52

Luxury Goods – Brand Routes

Case Study: Polo Ralph Lauren Corp

© Euromonitor International

...but strategy’s success depends on making progress in Asia • If PRL’s shift towards retail is to pay dividends, wooing the Asian consumer will be crucial. Regaining the licences for

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•

•

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Sales (US$ billion)

•

its Asia Pacific stores was a first step, but now the company has to energise a store portfolio positioned some way below the premium luxury image that PRL wants. The company’s licensing strategy in Asia Pacific, which began several decades ago, failed to keep pace with the changing demands of the Asian consumer base. Well known as a luxury brand in the rest of the world, in Japan and other Asian markets, it had historically held a much more mid-market positioning centred around the Blue Label men’s sportswear ranges. This has hindered its ability to tap into the exploding demand for luxury products within the Asian markets, and also from Asian tourists travelling to other markets. Asia’s contribution to PRL’s global sales is limited - less than 10% in 2010 - but now that the company has regained control of the 44 stores and 503 concessions in the region, it is hoping to grow sales in an attempt to offset difficult market environments in North America and Europe. As well as improving the retail distribution, building customer awareness of Polo Ralph Lauren as a premium brand is a cornerstone of the company’s strategy. So far, PRL has experienced some positive progress, claiming to have seen a strong customer response to stores given a luxury makeover. Polo Ralph Lauren: Sales by Region However, development of the existing store and concession 2009-2010 portfolio was geared towards the lower positioning, leaving 4 PRL to deal with a legacy of stores and locations do not fit a 3.5 more premium image. 3 As China, in particular, begins to consume luxury goods 2.5 voraciously, this is the ideal time to move a brand upmarket. 2009 President and COO of PRL, Roger Farah, has called this “a 2 2010 once in a lifetime opportunity to custom build this region, in a 1.5 manner that is aligned with our global luxury image.... 1 expected to transform the company in the long term.” 0.5 Nevertheless, as the brand tries to push upmarket in Asia, 0 and Asian consumers become more aware of a brand’s North America Europe Asia positioning elsewhere, there is a risk that the luxury message Source: company reports PRL is trying to communicate will become confused.

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Case Study: Polo Ralph Lauren Corp

Luxury Goods – Brand Routes

© Euromonitor International

Supporting Asian brand positioning: A key role for flagships • “We’ve noticed the extraordinary impact the Chinese

Newly acquired national retail licences

customer has had on other parts of the world as they travel.” Roger Farah, President and COO of PRL • With the exception of the Moscow store, all PRL’s flagships are in developed markets, but consumers from emerging markets, particularly China, are a key customer group. • Raising the profile of the PRL accessories range, as trialled in the latest flagship, a revamped double outlet on New York’s prestigious Madison Square Avenue, offers more entry-level products to attract new consumers to the brand.

• Sales at the latest flagship

exceeded the company’s expectations, mainly owing to strong demand for high-end items, but revenue generation is a secondary concern. • Positive reports of the stores by overseas visitors when they return home will provide vital support to the Polo Ralph Lauren brands’ move to a more luxury image in Asia... • ...which should then boost sales to visiting Asian consumers in Europe and the US.

PRL retail presence Denotes PRL flagship: New York (3), Chicago, London, Paris, Milan, Moscow, Tokyo

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Case Study: Polo Ralph Lauren Corp

Luxury Goods – Brand Routes

© Euromonitor International

Can outlet presence co-exist with Asia Pacific ambitions?

Support luxurious, exclusive, premium image

Outlets now account for half of PRL’s retail stores. Not only are Polo Ralph Lauren products available at steep discounts, but past-season clothing can even be found for sale at outlet stores, diluting exclusivity still further. PRL brands available at outlets are mainly mid-market variants; but do consumers make the distinction?

Brand flagships in New York and elsewhere and high-profile marketing events enhance the Polo Ralph Lauren premium positioning, even among emerging market consumers

Outlets in the US, Europe and Japan are as accessible to emerging market visitors as PRL’s flagship and premium locations; and organic growth of the outlet network is faster. Is the effect of the premium stores being nullified by the outlets?

Long-term plan: Reposition Polo Ralph Lauren as a truly luxury brand in Asia; build network of owned stores and online in the region, as upmarket wholesale doors are limited; profit from fast growth forecast for the region “The more we elevate our stores and merchandise mix, the stronger the customer response.” Roger Farah, President and COO of PRL

Confuse and dilute premium image

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Case Study: Polo Ralph Lauren Corp

© Euromonitor International

Navigating the market to drive growth and support the brand As a listed company, fulfilling shareholder expectations is a key task for PRL. Expansion should ensure strong ongoing growth; but the risk of brand overexposure should not be underestimated

Increasing profit margins

Keeping control of operating costs

Outlet stores = lower operating costs

Wholesale distribution = expansion with minimum outlay

Tapping into highgrowth emerging markets

Growing sales turnover Luxury flagships support premium brand positioning

Maintaining growth in developed regions Operating across a wide price spectrum Tapping into the lowerincome aspirational market

Wholesale distribution leans towards a mid-market positioning

Improving the luxury positioning of the PRL brands

Successful repositioning in Asia will offer PRL a bright future as a top luxury brand

Overexposure in non-luxury environments risks devaluing premium brand portfolio (the “Burberry effect”)

Investing in Asian retail network

PRL branding is relatively discreet; will this protect the portfolio from overexposure? 56

Luxury Goods – Brand Routes

Case Study: Polo Ralph Lauren Corp

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Can PRL’s premium/mass strategy ensure long-term success? • Of all the factors that influence share price, the market has proven itself most sensitive to fluctuations in profit

• • •

•

margin over recent years; even a 1% decline in sales during the year to March 2010 failed to dampen share price growth in the face of rising margins. Strong sales growth for the first three quarters of fiscal 2011 together with the completion of the company’s strategy to assume responsibility for its Asian operations have seen the share price climb still further. As a publicly-listed company the company has to balance near-term pressure of shareholder returns, while taking the long-term view of maintaining brand value. Repositioning itself as a more luxury brand in Asia while simultaneously operating an extensive mid-market and outlet portfolio in developed regions is an extremely delicate balance, particularly at a time when even emerging market consumers are increasingly globally aware, and often personally travelling, and shopping, outside their home market. For now, PRL’s efforts look to be succeeding on the back of extensive investment in its luxury store portfolio, but while its lower-end operations continue to offer immediate and obvious rewards, the company will continue to be pulled in two different directions. The company’s long-term success depends on its ability to juggle those competing pressures. Polo Ralph Lauren Corp: Profit Margin vs Share Price, Fiscal 2002-2011 126.6

9.6 7.3 86.5

Net profit margin fiscal 2002-2010 (%) Share price fiscal 2002-2010 (US$) Share price fiscal 2011 (US$)

27.6

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011 57

Luxury Goods – Brand Routes

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Introduction Luxury Market Overview Routes to Market: Wholesale Routes to Market: Retail Routes to Market: Online Case Study: Polo Ralph Lauren Corp Conclusion

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Luxury Goods – Brand Routes

Conclusion

© Euromonitor International

Conclusion: Luxury cycle and its retail consequences Retail reaction:

Recession • Aspirational luxury buyers disappear; sales drop across the price spectrum as even some high-income buyers pause to assess the damage.

• Deep discounting becomes the norm, particularly affecting revenues from wholesale distribution channels. • Wholesale order levels fall.

Retail reaction: • In order to reach a larger market, some brands relax their control on distribution; reliance on wholesaling grows.

Boom • Sales growth targets become more ambitious; luxury brands widen geographic and consumer bases in search for extra sales. • Brands begin catering for a resurgent aspirational consumer base.

Recovery • Premium luxury recovers, though buyers look for value-holding “classic”’ pieces; brand image often supported by marketing which emphasises heritage and quality.

Retail reaction: • Control becomes a priority for luxury brands, partly to maintain price points and partly to support brand image/heritage. Stronger emphasis on owned stores is common. • Wholesale revenues begin to recover, but brands are wary of relying on them. 59

Luxury Goods – Brand Routes

Conclusion

© Euromonitor International

Conclusion: Balancing act required from luxury brands • Enhances selective/

Premium exclusive brand attributes retail • Supports brand image across environments owned and wholesale environments • Direct customer contact helps to communicate brand values • Difficult to recreate luxury environment online

• Widens distribution without

store overheads • Can open up brand to different customer base • Can be used to adjust brand positioning • Some loss of exclusivity

• Narrower presence

• Loss of control over pricing

• Higher operational costs

• Potential for third party retail standards to

slip

• Harder to attract new consumers to brand

Brand-controlled retail

Wholesale

• Caters to aspirational buyers

• Wider distribution

• Lower-price branded alternative to

• Caters to aspirational buyers

counterfeit goods • Lower operational costs

• Formats such as limited-time sales solve

• Major loss of exclusivity

• Loss of exclusivity

• Potential for branded outlet stores to

• Negative impact on main line pricing

damage brand equity • Significant negative impact on main line pricing

• Harder to identify sellers offering

overstock issues but limit brand damage

Outlet formats

unauthorised or counterfeit goods

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Luxury Goods – Brand Routes

Conclusion

© Euromonitor International

Conclusion: Luxury’s evolving approach to distribution Category

Key markets

High growth distribution

Designer clothing and footwear

US, Japan, Italy

E-commerce, m-commerce and directly-operated stores

Fine wines/ Champagne and spirits

UK, Japan, US

Wine specialists, online, homeshopping, department stores

Luxury accessories

US, Japan, Italy

Department stores, flagships, owned stores, internet, opticians

Luxury electronic gadgets

China, Brazil, Turkey

Owned stores/flagships, department stores, jewellers, duty-free, hotels, online

Luxury fine china and crystal ware

China, France, Saudi Arabia

Department stores

Luxury jewellery and timepieces

US, India, France

Jewellers/specialists, department stores, owned stores

Luxury tobacco

US, Germany, China

Other venues (eg clubs, societies), online

Luxury travel goods

US, Japan, China

Owned stores, department stores, duty-free, hotels, online

Luxury writing instruments and stationery

US, Japan, China

Department stores, owned stores, specialists, online

Super premium beauty and personal care

China, US, UK

Department stores, owned stores, duty-free, online

This category is set to remain dominated by developed markets, but China and India are both showing major growth; brands need to nurture customer interest in these markets. By 2015, Brazil will have replaced Japan as the second largest market for this category. Few of the biggest brands have stores in the region, so expansion will be required in order to tap into market potential. India is forecast to be this channel’s second largest market by 2015. The presence of luxury department stores in this market is limited, so brands should consider widening their DOS network, and exploring locations that high-income customers are likely to pass through, such as airports and hotels. Luxury tobacco has been slow to explore online potential, but trends such as cigars for female smokers point to a category that is beginning to modernise. Could a move to ecommerce be next? 61

Luxury Goods – Brand Routes

Conclusion

© Euromonitor International

Potential to 2015: Routes to market for luxury goods

• The popularity of directly-operated stores is likely to continue, as brands begin to take back control of franchised operations and expand their own store networks.

Strong growth

Internet Retail

• Relationships between luxury brands and their wholesale distributors have suffered damage over the past 2-3 years, but as sales recover, a level of trust will return.

Significant growth

Retail

Wholesale

Healthy growth

• Over 2010-2015, more luxury brands will become proactive in their approach to non-store activities. • Key strategies: • Creating transactional websites so that customers all over the world can buy products directly from a brand, minimising the risk of counterfeits; • Using brand websites to showcase products, and social networking sites to connect with consumers; • Social networking strategies will need to be flexible enough to work across different sites in order to target the right consumer bases in the right environments.

• In the medium term at • Many brands have learnt to least, luxury brands seem value the control that set to be more cautious operating their own stores about the wholesale doors offers, particularly in they will sell through. There emerging markets. will be a stronger focus on • The internet allows brands store standards at third to distribute on a global party retailers, and basis; this is an area set to inventory control. expand over 2010-2015. • Long term, as memories of • Brands that rely too heavily the recession fade, and on directly-operated stores brands focus more on may find it restricts their international expansion and international expansion; aspirational sales, wholesale distribution will wholesale growth will rise. still have a part to play. Definitions are for the purposes of this report. Company-specific definitions may vary

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Luxury Goods – Brand Routes

Conclusion

© Euromonitor International

2015 and beyond: Key strategies going forward Wholesale

Retail

Online

• As brands become more globalised,

• The internet, particularly short-term,

• The tide is already turning in terms

their need to spread the message of their luxury positioning more widely will raise competition for shelf space at influential third party retailers, from fashionable boutiques to ultra premium department stores. • A more bespoke approach from brands towards these retailers is expected, featuring exclusive ranges, limited-time offers and brand collaborations aimed at a specific store.

exclusive offers, could result in of luxury brands launching their own brands who currently use outlets transactional websites, but care purely to get rid of surplus stock must be taken that the increase in exiting the brick and mortar outlet remote sales does not leave brands format completely. Losing those few, out of touch with their consumers. harder-to-find stores could devalue • Expect a greater emphasis on the outlet mall concept as a whole, interaction, even if it is not face to with a detrimental effect on brands face: live one-to-one styling advice, that are heavily exposed to this product customisation options, market. lifestyle-related add-ons. • Expect brands to start making a clearer distinction between their outlet activities and their higher-end collections.

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Definitions of the Report

Luxury Goods – Brand Routes

© Euromonitor International

Definitions DOS: Directly-operated stores, ie stores under the direct control of the brand owner, rather than a licensee or franchise operator. HNWI: “High Net Worth Individual”; definitions vary, but generally refers to a person with US$1 million or more of investable assets.

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