Launching a Luxury Brand: Market Analysis and Strategy

Introduction to the Luxury Brand Concept

The business idea presented here is to launch a luxury brand. The concept of luxury is difficult to pin down because it is relative. Marketers have commonly misused the term, 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 toward the luxury end of this spectrum (Heine, 2014). Any given product has a certain intrinsic value: a car, for instance, is a means of transportation. Luxury implies, however, that this intrinsic value represents 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 of any luxury brand — very little of the value in a Hermès scarf has to do with keeping one's neck warm.

This dynamic introduces the concept of relative luxury. Compared with an entirely utilitarian product, almost anything with any luxury element can be marketed as such. However, the status of "luxury brand" is typically reserved for products whose value derives almost entirely from luxury attributes. The characteristics that define luxury, as opposed to utility, must therefore be understood. These are exceptional quality and durability, design, status projection, and exclusivity. Heine (2014) argues that a luxury product should possess all of these attributes, and uses the example of prestige products within mainstream categories — a BMW automobile is a good illustration — to make the point. A true luxury brand not only projects status and reflects high-end workmanship; it must also be exclusive. With those characteristics in place, the actual product type becomes less important, as luxury brands exist across many different consumer goods sectors, including fashion, accessories, vehicles, leather goods, and jewelry.

The luxury brand being proposed here 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 derives in part from the company's origins. A luxury brand should therefore be headquartered somewhere associated with luxury and the luxury brand ethos. London is a global fashion centre and is thus a strong fit for launching a luxury brand, particularly in fashion, following in the tradition of brands such as Burberry, Paul Smith, and Asprey. Such a brand cannot be headquartered in an industrial area, even if that would be more cost-effective. The address itself must carry prestige.

The motivation behind creating a new luxury brand lies in the growing market for luxury goods. While traditional markets have matured, Middle Eastern and Asian markets are experiencing very strong growth in luxury goods — a reflection of increasing wealth and a demand for luxury brands that symbolizes those cultures' desire to announce their arrival on the world stage. A pattern of retail clustering among luxury brands has also emerged, which creates an opportunity for new market entrants, particularly where growth is strong. St.-Michel's mission is to continue the tradition of British luxury goods and establish a foothold in the global luxury goods market.

Research Question: What is the market potential for a new entrant into the global luxury goods market?

Objectives: This business proposal sets the tone for market entry. The market objectives are to open a flagship store in London first, then move into overseas markets — perhaps with an initial presence in Shanghai or Dubai — growing to a dozen or more stores within three years, depending on supply chain capabilities. The purpose of this proposal is to establish a pathway for determining the potential market for a new British luxury goods brand globally. Additionally, where possible, it aims to identify any unfilled demand within the luxury goods segment.

Market Size and Characteristics

Industry analysts estimate that the global market for personal luxury goods stands at €223 billion, an increase of just 2.3% over 2013 levels. The market was expected to flatline in 2015. Thus, while the market is large, it was not growing as quickly in recent years as it had been in the years prior (Wendlandt, 2014). The market is divided roughly equally among North America, Europe, and Asia. North America and Europe represent more mature markets, with most recent growth coming from Asia and other emerging economies.

While China had been a key growth driver for luxury brands, spending on luxury goods was flat in China in 2014. Industry analysts pointed to a slight maturation of the market and saturation by second-tier or aspirational luxury brands, which diminished the appeal for some consumers. It is believed, however, that genuine luxury brands will be able to sustain growth in China going forward — past rates of growth were unsustainable, but future rates are expected to be steady (Wendlandt, 2014). A concern remains that some brands have opened too many stores in China, which can diminish a brand's exclusivity.

Among other growth markets, Russia has been affected by sanctions, reducing its role as a luxury goods growth market. Growth in markets such as Japan and the Middle East has been slow, reflecting maturity in those markets. The Americas, however, has shown room for growth in recent years. Luxury brands, which traditionally had limited appeal to Latin American consumers, are beginning to gain strength across the Americas and in the United States. The growing popularity of luxury brands in Asia is also beginning to have a spillover effect among second- and third-generation Asian Americans (Wendlandt, 2014).

A key growth area for luxury goods is online retail. While luxury brands were slow to adopt the Internet, they have found that reaching younger customers requires stronger e-commerce capabilities. Some analysts believe that online sales could add $43 billion in incremental revenue to the luxury goods industry by 2020 (Roberts, 2014). Luxury goods have traditionally been an in-person shopping experience, but many brands now appeal to busy professionals who lack time to travel and to younger consumers who are accustomed to purchasing online. Both factors support the view that online retail represents a significant market opportunity for luxury brands.

Existing Competitors

The luxury brand industry is diffuse. There are dozens of major competitors, even more minor ones, and a large number of quasi- or near-luxury brands that seek to attract consumers who desire luxury goods but are somewhat more cost-conscious. One of the notable characteristics of luxury brands is that they span a multitude of product categories. Any two luxury brands may not compete with each other in any given product, so the exact competitive set for St.-Michel will depend on its product mix.

Luxury brands are often complementary at the retail level. They tend to cluster on high streets or in malls where customers can visit a dozen or more luxury brand stores in one outing. Standalone luxury brand stores are uncommon. Within this retail context, however, brands selling similar products engage in intense competition for clients. Most luxury brand companies have one or two major product focuses. There are exceptions — in some cases, luxury goods conglomerates have emerged with multiple brands, such as Louis Vuitton Moët Hennessy (LVMH). The market leaders in luxury personal products, ranked by brand value, are: Louis Vuitton ($22.7 billion), Hermès ($19.1 billion), Gucci ($12.7 billion), and Prada ($9.45 billion), followed by Rolex, Chanel, Cartier, Burberry, Fendi, and Coach (Roberts, 2013). All are billion-dollar brands by brand value, underscoring that the industry has many strong players but no single dominant one.

References

Heine, K. (2014). The concept of luxury brands. Concept of Luxury.com. Retrieved November 24, 2014 from http://www.conceptofluxury.com/concept/Heine_TheConceptofLuxuryBrands.pdf

Roberts, A. (2013). Louis Vuitton loses ground as world's most valuable luxury brand. Bloomberg. Retrieved November 24, 2014 from http://www.bloomberg.com/news/2013-05-20/louis-vuitton-loses-ground-as-world-s-most-valuable-luxury-brand.html

Roberts, A. (2014). Luxury brands can't avoid the Internet any longer. Business Week. Retrieved November 24, 2014 from http://www.businessweek.com/articles/2014-11-06/luxury-brands-seek-online-sales-as-china-growth-slows

Shea, E. (2014). Future of fashion brands depends on millennial brand affinity. Luxury Daily. Retrieved November 24, 2014 from http://www.luxurydaily.com/millennials-are-a-crucial-target-for-luxury-fashion-marketers/

Wendlandt, A. (2014). Global luxury goods sales growth to stabilize in 2015: Bain. Reuters. Retrieved November 24, 2014 from http://www.reuters.com/article/2014/10/14/us-luxury-report-idUSKCN0I320H20141014