BrandWatch by Michel Gutsatz

Generation Y & Luxury

Do you know "Generation Y" (or the "Millennials")? Born between 1977 and 1994, they represent, for example, 25% of the American population and spent over 150 billion in 2009. This is the generation of social networking and Netizens, environment protection and NGOs, personalization and information seeking.

A fascinating study on their relationships with luxury brands has just been published in the U.S. (conducted by Scott Galloway of the NYU: "Generation Y Prestige Brand Ranking"). 450 consumers with yearly incomes of around $ 100,000 were questioned: the results are a subject for reflection. Here are a few of them:

• The brands were classified into five groups: "Epic" / "Best Friend Forever" / "Whatever" / "Tired" / "Off The Grid".  Of the 105 brands analysed, only 12 are considered "Epic" (and 26 "BFF") by women, and 9 by men (and 18 are "BFF") – i.e., less than 10%!
• The brand considered the most powerful by men is Apple, and Chanel for women.
• The car brands (BMW / Audi / Mercedes) feature among the "Epic" brands for men AND women.
• Some brands provoke very diverse reactions: they are both among the top 20 AND the most unpopular. These include Vuitton and Burberry - because these brands are perceived as too "flashy". Among the brands the most disliked are also De Beers, Land Rover and Cadillac, perceived as not being environment-friendly...
• Watch and jewellery brands are not on their radar (with the exception of Cartier, Tiffany and Rolex).
• Brands that develop real "social media" strategies find favour with them.
• Online purchasing is growing strongly - more on private sales sites (such as yoox.com or gilt.com) and retailers (such as netaporter.com) than on the sites of the brands themselves.

Luxury brands should draw several strategic lessons from this:

1. Generation Y is their new customer base in mature markets (AND in China as I have repeated quite often on BrandWatch).
2. They should acquire effective Internet strategies - and when I say "strategies" I do not mean just the addition of an online sales site, a Facebook page, a Twitter account, etc.
3. They should overhaul their customer relationships completely, focusing on Customer Experience: to do this, a proper segmentation of their customer bases should be carried out.
4. They should be credible in their environmental and responsibility strategies.

Another look at the new Japanese consumer

Last September I posted a couple of notes: "Luxury: Japan is not what it once was”. A new McKinsey study, "The New Japanese Consumer, has largely validated my analysis and identifies some recent developments that confirm that the behavior of Japanese consumers now largely resembles their counterparts in Europe and America. Here are some features to remember:

• A return to the home seen as a "nest".
• An increase in sales through the Internet - demonstrating the desire to shop “at my own pace".
• Higher expectations in matters of "health" and "environment": "Consider, for example, Coca-Cola's I LOHAS (Lifestyles of Health and Sustainability) Water, whose selling points include a reduced carbon footprint: bottles are Made from 12 grams of recycled PET plastic (rather than the standard 26 grams) that can be twisted and compressed when recycled. I LOHAS is also bottled locally, reducing transportation costs. Less than 12 months after its launch, It has become Japan's top-selling brand of single-serve bottled water”.
• A quest for the most competitive prices ("Return to value") - we see that sales of private labels are finally developing in Japan.

Luxury brands are directly affected by this reversal, as the recent changes in the Ginza landscape show - until quite recently one of the areas that luxury brands invested heavily in:

1. A Gucci store has been replaced by a American mall brand, Forever 21.
   
   
   
 

2. In December 2008 Vuitton announced they were dropping the project to open a new store (there are already two!): Gap will be opening there instead.
3. Uniqlo has expanded its flagship sales point by taking over the two floors left vacant by Brooks Brothers.
   
   
   
4. H & M and Zara set up shop there in 2008.
5. Tony Burch, the mid-range American brand, has recently opened - with intensive advertising in the metro. 

   
   
   

Thus "fast fashion" is investing the Ginza area - instead of luxury brands. The boom is over and they will have to rethink their business models (see my posts of September where I outlined various approaches).

Abercrombie & Fitch: Zero Points in Japan

A few weeks ago I proposed an objective analysis of the Abercrombie & Fitch business model, where I contended that it is a pure marketing concept, and that progress cannot be based on a constant race against time.
Before its soon-to-be opened stores in Europe, it opened an 11-storey store in Tokyo last December. The Japanese fans of the brand (those who had purchased its products in the U.S.) contributed to make the opening a success but .... but the press immediately ripped it apart. They underscored 2 reasons to predict a dull future for Abercrombie:

• Its price positioning: at a time when the Japanese evince profound changes in their attitudes towards luxury and where the brands that are doing well are Uniqlo, Forever21 or H & M – i.e. brands that make moderate prices a real sales argument, Abercrombie & Fitch has chosen to offer its products at prices that are double those in the USA! This is making a fundamental error where Japanese consumers are concerned; they have become much more sophisticated and are no longer prepared to overpay any product.
• Its cultural positioning: the brand has chosen an approach based on American codes - which happen to conflict with most Japanese cultural codes - The choice of a non-Japanese sales staff, a noisy ambiance considered as inappropriate by the Japanese, the choice of English to address the customer(s), shirtless male vendors, the use of perfume in a confined space, the lack of light that prevents one from judging the colour or quality of the product... a whole series of issues that were alluded to which show that the brand has deliberately chosen to replicate the codes that made it successful in the U.S. at the risk of alienating a significant number of its potential customers in Japan.

Time will tell whether this is a wise choice or if the brand will, like others before it, close shop and retreat to markets more in line with its values.

Issues Luxury Faces in a World Grown Complex (1)

Bain announces a stable 2010 for luxury goods (+1% on the basis of fixed exchange rates) after two disastrous years: 2008 with -2% and 2009 with -8%, which would set the global luxury market at 155 billion Euros, i.e. at the 2005/2006 level. Analysts diverge between the idea that 2011 will take off "like before the crisis", and fears that it has fundamentally changed consumer behaviour. I propose an analysis that is more nuanced – spotlighting the new complexities of the luxury market. This post is the first of a series on the issues of luxury – we shall return to study them point-by-point.
Let us first talk about markets:
Western markets: Many factors tend towards a questioning of conventional attitudes vis-à-vis luxury and to a revision of values.

• The decrease in incomes and the end of a cycle of easy credit will significantly reduce the purchasing power of "middle-of-the-road" customers of luxury brands.
• The emergence of a new collective ideal that I call "The Era of Responsibility" will make more and more consumers prioritize and measure the consequences of all that they purchase: fewer of the frivolous, more of the useful – constant appraisal - a search for accountable pleasures.
• The most affluent purchasers of luxury will also return to values that are more simple - those of the middle class from which they come: the money will go primarily into the education of their children, their homes, to their hedonistic and intangible experiences... not necessarily to material goods.
• We should therefore see conspicuous consumption being put into question ("could you please put this bag in an unmarked bag?" being one of the manifestations) in these markets.
• Finally, as the studies in my posts of 13 and 20 September 2009 stated, Japan is no longer what it was: it has become a mature market like the Western markets - and should therefore be treated as a market of very sophisticated and demanding consumers.

Emerging markets are seen by most brands as their new El Dorado. I believe that one should keep one’s head.  In fact:

• The Russian market has collapsed;
• The Indian market is not living up to expectations: when Mumbai is flooded with messages like: “Last 10 days of up to 60% off on Moschino, Ferretti, Jean Paul Gaultier & Marc by Marc Jacobs at the Taj Colaba! 4 brands at one place! Grab yours!”, “1st Time in Mumbai DVF designer collection! Indulge yourself in bold colours and lush prints. Discount up to 50 %”, one can rightly say that there is a misconception somewhere (I will soon return to the Indian market in detail).
• The Chinese market will indeed become the second most important global luxury goods market. But as I said in my posts of 19 May and 17 October 2009, Chinese consumers are becoming more sophisticated at a pace never seen before. Analysts from Bain say: "Top tier cities suffering from already "maturity" of the local luxury consumer" ...

So, from a market perspective, the coming years will demand responses that are much more complex than those which most brands are used to.
Next week I will offer a follow-up of this analysis: I will address the issues of price, quality & service...

Luxury: Japan is no Longer What it Was... (2)

What strategies should luxury brands adopt faced with such profound change in the behaviour of Japanese consumers (see my post of 13 September)?

The McKinsey report suggests a number of tactics, without much originality, that have all been employed by luxury brands to a lesser or greater extent: reduce costs, strengthen brand equity, increase the number of distribution channels (Internet, mobiles, shop-in-shop, private sales ..), over-invest in CRM ...
I suggest tackling the problem at the base, from a luxury product customer's standpoint, from where one may draw some conclusions with regard to luxury brands.

• There is no longer such a thing as a typical consumer. There is also no longer a simple divide between "loyal" and "occasional" customers – the implicit schema of luxury brand marketing. There is now an entire typology of luxury brand consumers: each "type" has a different "psychological" profile (trendsetters / bandwagon / connoisseurs / ...), specific expectations regarding products (bestsellers / unique products / fashion products / entry-level products ...) expecting a unique relationship with the brand.
  Brands must therefore create their own client typology and develop real marketing strategies for each segment. To do so they will have to, above all, strengthen their marketing teams (central AND local): remember that "marketing" is still considered a function that is not very noble by certain brands ...
• The prices of luxury goods have reached exorbitant levels - that is justified by nothing in the eyes of a growing number of consumers. Japanese consumers, like Western consumers, are well-informed and demanding: they are willing to pay if the value (material, symbolic, cultural…) of the product matches the level of the price. Otherwise they will buy cheaper brands. 

  Brands will have to completely revise their pricing strategies. Start by not having to pay prices that are 40% to 70% more (or plus) in Japan. Give meaning to their brands and rebuild their fundamentals (e.g. really make efforts with regard to quality and the importance of savoir-faire).  In this regard Louis Vuitton remains exemplary (see my post of 8 August).
• Rarity is one of the fundamentals of luxury: if a luxury brand is perceived as being available "anywhere", it loses its value to consumers. How does one then reconcile the need for expansion (in mature markets) and this need for rarity? 

  There are too many shops in Japan: the figures I gave last week show that most luxury brands have twice as many sales-points in Japan than in the U.S. – for comparable markets. Except for Vuitton: at the end of 2008 they had 56 boutiques and shop-in-shops in Japan against 101 in the USA. Some brands will have to rethink their retail strategies: to consider closing some boutiques, or to reserve some of them for specific types of consumers or for certain types of products. In other words, recreate rarity.

Evidently, this does not concern only Japan. All the mature luxury brand markets are sailing in the same boat and the implications for brands that I point here reach far beyond that of Japan alone. They will have to practice more sophisticated marketing strategies, set aside the "one size fits all" that still implicitly structures their approach to markets... and not fall into the current magic idea that "China is our future El Dorado", because the Chinese market is going to mature much faster than the luxury brands could ever imagine.

Luxury: Japan is No Longer What it Was (1)

McKinsey has just published (August 2009) a market survey, "Japan's luxury shoppers move on", which has created quite a stir in the world of luxury: After interviewing 1500 Japanese consumers of luxury goods, they conclude that the habits of the Japanese are changing profoundly with regard to luxury and the significant decline in sales observed is not solely due to the economic crisis. "Some luxury players understand these changes and are adjusting to them, but many still believe that everything will return to normal, whatever that means, once the downturn has passed. Those companies may be in for a surprise". I propose to go through this study with you and analyse the main results.

The Japanese luxury market is, according to market researches, either No. 1 or No. 2 worldwide: McKinsey estimates it at 20 billion $ (as against 26 for the USA)... but if one includes the purchases made by Japanese abroad, the most important clientele for luxury brands is clearly the Japanese.
But 2008 saw a 7% fall in sales of luxury goods; and 2009 is predicted to be even worse (some of the professionals interviewed by McKinsey speak of - 20% in the first quarter). However, one needs to go further back in time to realize that the real change took place in 2006, well before the crisis.

What happened?
The McKinsey report highlights 4 major changes, of which the first two are to me the most important:

• Increasing individualism - and therefore less conventionality in brand choices: in a Nikkei survey of December 2008, 86% of Japanese said they endorsed, "I mix and match my clothes according to my own tastes".

• The transition from traditional, tangible luxury, to intangible luxury: Japanese consumers increasingly resemble their Western counterparts and are looking for experiences (food, spas, vacation, leisure, etc.)
• The increase in the number of luxury brands - attracted by what has become a veritable El Dorado – as well as less expensive Western brands such as Diesel: the traditional luxury brands face increased competition with consumers who are more individualistic, therefore more likely to mix and match brands.
• A significant decline in department-store sales (the principal channel for selling luxury goods in Japan)

The Japanese consumer is changing and luxury brands, carried away by the euphoria of recent years, will have to change their approach to this market: when Burberry has 75 stores in Japan and only 32 in the USA, Hermes 64 against 30, Prada15 against 35 and Bulgari 31 against 17 - twice as many shops in Japan than the USA, when the two markets are comparable to a large extent - one can only conclude that there is "something rotten in the kingdom of Denmark". I would be curious to know the trend in sales per square meter in boutiques in Japan...
This luxury is no longer that of exclusivity and rarity. It has to reinvent itself and Japan shows us that the Emperor is indeed naked ... I propose to revisit this subject next week.

Transmitting the Gestures of Beauty – an Issue

For several years I have persistently drawn my clients' attention to how women have forsaken the "gestures of beauty". I show them how the imparting of the gestures relating to face care and makeup, which are traditionally passed down from mother to daughter, have been lost, even in our Western countries. I explain that present-day consumers are at a loss: How does one use eye shadow? How is makeup foundation applied? What products should be used to cleanse the skin? In what order should they be used? 

These questions are asked by women the world over. Japanese women find answers in the "self esthe salons" where, for a very modest hourly fee, they can go to skin care and makeup cabins where a beautician leads them through the practices for every day beauty. 
 But my customers do not seem ready to take the leap and take charge of these essential basics: When I tell them that one day a brand will use the rapport with clients a veritable platform and offer spaces where the gestures of beauty are re-learned, I see them nod their assent but I know they will merely review the designs of the leaflets in their beauty product boxes ... or hire a new make-up-artist.
The consumers themselves then take over. Using the Internet, they share these gestures and reclaim them. The New York Times (August 11, 2009), speaks of Lauren Luke, an English girl of 27 years who, in order to sell more of the beauty products she marketed on e-bay, chose to post videos on YouTube showing her applying these products. "For years I've been doing what the magazines tell you and wondering why I came away feeling inadequate ... we've all had enough of lies". 
 Twenty months after the first videos, they have been viewed by over 20 million people and her YouTube site has 250 000 members in 70 countries.
So when will a beauty brand really focus on the question? Unless Sephora does so (which is launching the Lauren Luke range of beauty products and organizes makeup competitions with her)?

The Obligation of Health: A Japanese Example

For the past several months, at all the conferences that I hold, I draw attention to the emergence of new social norms with which we are required to comply. One of them is the obligation of health: we have to do everything to stay in good health at all times. We must feed ourselves properly, avoid smoking, drink moderately (or even not at all): these resulting in campaigns on nutrition, fights against tobacco, against alcohol. Non-compliance with this new standard not only puts our health at stake, but endangers society as a whole: we then become a financial burden on society.

The New York Times of 13th June 2008 vividly illustrates this issue.