The business idea is to start a luxury brand. The concept of luxury is difficult to pin down, because it is relative. Marketers have misused the term commonly, but despite this, and the emergence of a substantial grey area, the category of luxury brand is still understood fairly well by consumers. Theoretically, luxury falls at one end of a luxury-necessity axis. A luxury brand, therefore, implies that the product's benefits fall almost entirely towards the luxury end of this spectrum (Heine, 2014). Any given product has a certain intrinsic value -- a car is a means of transportation. But luxury implies that the intrinsic value is a relatively small portion of the total value. Most of the value in a Bugatti Veyron lies far beyond its utility as a transportation machine. The same can be said for any luxury brand -- very little value in a Hermes scarf has to do with keeping your neck warm.
This idea introduces the concept of relative luxury. Compared with an entirely utilitarian product, just about anything with any luxury can be marketed as such. But the status of "luxury brand" is typically reserved only for those products with value that derives almost entirely from luxury aspects. Thus, the characteristics that define luxury, as opposed to utilitarian, must be understood. These are exceptional quality/durability, design, status projection and exclusivity. Heine (2014) argues that a luxury product should have all these attributes, and uses the example of prestige products within mainstream categories -- a BMW car would be a good example -- to illustrate the point. A true luxury brand not only projects status and is of high-end workmanship, but it should also be exclusive. With those characteristics, the actual product itself is less important -- luxury brands exist within many different consumer goods sectors (fashion, accessories, vehicles, leather goods, jewellery, etc.)
The luxury brand we are creating is called St.-Michel and it will be based in London. One of the important elements of a luxury brand is prestige, and that prestige in part derives from the company's origins. A luxury brand should therefore be headquartered somewhere that is associated with luxury, and the luxury brand ethos. London is a global fashion centre, and therefore is a good fit for starting a luxury brand, in particular in fashion, following on the heels of brands like Burberry, Paul Smith and Asprey. This brand cannot be headquartered in an industrial area, even if that would be more cost-effective. The address must have sex appeal.
The motivation behind creating a new luxury brand lies in the growing market for luxury goods. While traditional markets are mature, Middle Eastern and Asian markets are experiencing very strong growth in luxury brands, which is a reflection of their growing wealth and demand for luxury brands symbolizes the need of these cultures to announce their arrival on the world stage. We have seen a pattern of retail clustering in luxury brands, which creates an opportunity for new market entrants, in particular where there is strong growth. Our mission is to continue the tradition of British luxury goods, and gain a foothold in the global luxury goods market.
What is the market potential for a new entrant into the global luxury goods market?
This business proposal will set the tone for our entrance into the market. The market objectives are to first open a flagship store in London, and then move into overseas markets, perhaps with a presence in Shanghai or Dubai initially, but growing from there to a dozen or more stores within a three years, depending on our supply chain capabilities. The purpose of this business proposal is to set out a pathway for determining the potential market for a new British luxury goods brand in the global luxury goods market. In addition, if it is possible it would be valuable to gain some insight into where there might be an opening, in terms of unfilled demand, within the concept of luxury goods.
Literature Review -- Market Size and Characteristics
Industry analysts estimate that the global market for personal luxury goods is €223 billion, an increase of just 2.3% over 2013 levels....
The market is expected to flatline in 2015. Thus, the market is large but is not growing as quickly in recent years as it had been for several years prior (Wendlandt, 2014). The market is divided roughly in three between North America, Europe and Asia. North America and Europe are more mature markets, with most of the growth in recent years coming from Asia and other emerging markets.
While China has been a key growth driver for luxury brands of late, spending on luxury goods was flat in 2014 in China. Industry analysts point to a slight maturation of the market, and saturation by second-tier or aspirational luxury brands, which turned off those consumers to some degree. It is believed, however, that genuine luxury brands will be able to enjoy sustained growth in China going forward -- that past rates of growth there were unsustainable but future rates will be steady (Wendlandt, 2014). There is a concern that some brands have opened too many stores in China, however, which diminishes a brand's exclusivity.
Among other growth markets, Russia has been hit with sanctions, leading to a diminishing of Russia as a luxury goods growth market. Growth in other markets, like Japan and the Middle East, has mainly been slow, the result of maturity in those markets. The Americas, however, has shown some room for growth in recent years. Luxury brands, which traditionally did not have too much appeal to Latin American consumers, are beginning to show strength in the Americas, and in the U.S. The burgeoning popularity of luxury brands in Asia is starting to show signs of having a spinoff effect on second- and third-generation Asian-Americans (Wendlandt, 2014).
A key growth area for luxury goods is online. While luxury brands were slow to adopt the Internet, they have found that to reach younger customers they have needed to improve their e-commerce capabilities. Some analysts believe that online sales could add $43 billion in incremental sales to the luxury goods industry by 2020 (Roberts, 2014). While luxury goods have traditionally been an in-person shopping experience, many brands appeal to both people who work and therefore do not have time to travel the world shopping, and appeal to younger consumers who are accustomed to buying online. Both factors are driving the belief that online represents a significant market opportunity for luxury brands.
The luxury brand industry is diffuse. There are dozens of major competitors, even more minor competitors, along with a large number of quasi- or near-luxury brands that seek to siphon off consumers who want a luxury brand but are maybe a little more cost-conscious. One of the interesting elements of luxury brands is that they exist in a multitude of product categories. Any two luxury brands may not compete with each other in any product. Thus, the exact competitors will depend on what the product mix of our brand is going to be.
Luxury brands are often complementary. They tend to be clustered at the retail level, either on a high street or in a mall, where a customer can shop at stores for a dozen luxury brands or more. It is uncommon to see a standalone luxury brand store. Yet within this retail context, brands that sell similar products will often engage in intense competition for clients. Most luxury brand companies have or two major product focuses. There are exceptions, and in some cases luxury goods conglomerates have emerged with multiple brands, such as Louis Vuitton Moet Hennessey. The market leaders among luxury brand personal products are by brand value are: Louis Vuitton ($22.7 billion), Hermes ($19.1), Gucci ($12.7) and Prada ($9.45), followed by Rolex, Chanel, Cartier, Burberry, Fendi and Coach (Roberts, 2013). All are billion-dollar brands by brand value, highlighting that the industry has many strong players, but no one dominant player.
Market Entry Costs
There are relatively low entry costs to this market. Most luxury brands are vertically-integrated, handling much of their production and retail themselves. Larger brands use third-party contractors for production, but a start-up house like ours will maintain internal production capabilities initially. Part of this will be to maintain the 'made in the UK' branding, and part of this will be in order to maintain full control over quality. If the goods do not meet the customers' expectations for both quality and design, then not only will the company be unable to charge luxury brand prices but it will be unable to build its reputation as a luxury brand. So there will be some entry costs associated with vertical integration.
It is not expected that there will be significant marketing costs initially, just a storefront, but the expansion strategy is going to be require at least some marketing in order to introduce the brand to foreign audiences. In the UK, a luxury boutique can speak…
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