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Luxury Goods Industry Analysis 2013

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Presented by: Stephanie So, Evan Lui, Vanessa Yau, Richard Kan & Trevor Li
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Page 1: Luxury Goods Industry Analysis 2013

Presented by: Stephanie So, Evan Lui, Vanessa Yau, Richard Kan & Trevor Li

Page 2: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

What is luxury?

Luxury goods have more than the necessary and ordinary characteristics compared to other products of their category���

Page 3: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

characteristics of luxury products

“The  Concept  of  Luxury  Brands”,  2012  

Page 4: Luxury Goods Industry Analysis 2013

INDUSTRY BACKGROUND���

Page 5: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Global Market size

Bain  &  Company,  2012  

Page 6: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

growth by geographic markets

Pwc,  2012  

Page 7: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Growth by product category

Pwc,  2012  

Page 8: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

recent trends

•  Globalization – over 40% of sales is from “luxury tourism” ���

Bain  &  Company,  2012  

Page 9: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

recent trends

•  Globalization – plenty of untapped potential in emerging markets���

Bain  &  Company,  2011  

Page 10: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

recent trends

•  Consolidation – individual brands are bought up by large luxury groups���

Bain  &  Company,  2011  

Page 11: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

recent trends

•  Consolidation – large companies experience much higher margins���  Brand recognition (esp. emerging markets)���  Economies of scale (eg. advertising)���  Optimal brand portfolio management���

Pwc,  2012  

Page 12: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

recent trends

•  Diversification – apparel brands branch out to other luxury product categories, eg. jewelry, cosmetics, perfume, even restaurants���

McKinsey,  2012  

Page 13: Luxury Goods Industry Analysis 2013

INDUSTRY COMPETITIVE ANALYSIS���

Page 14: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

The five forces model

Porter’s Five Forces

Model

The Threat of New Entrants

Rivalry among

Existing Competitors

Suppliers’ Bargaining

Power

Buyers’ Bargaining

Power

The Threat of

Substitutes

Page 15: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Threat of new entrants

Brand Loyalty Scale Economies Capital Requirement

Exclusive Access to Suppliers & Distribution

Potential Retaliation from Existing

Companies

Page 16: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

brand loyalty

❧ Brand image and CRM programs build high brand loyalty���

Page 17: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

brand loyalty

❧ Decreasing brand loyalty as a result of different needs in emerging markets���

Emerging��� Traditional���Emerging���

• Extravagance���• Status���• Obvious brand

logo���

Traditional���

• Craftsmanship���• Exclusivity���•  Innovation���• Service���• CRM���• Heritage���

easily switch to other brands of similar status���

Pwc,  2012  

Page 18: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Scale economies

❧ Consolidation of luxury brands achieve high economies of scale���– e.g. LVMH, PPR (Gucci), Prada

Group, Richemont���– Minimize risk through

diversification in the company brand portfolio���

– More financing options e.g. IPO���– Operating synergies e.g.

advertising���

Page 19: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

capital requirement

❧  A very high break-even point ���❧  “…In the luxury sector, even the smaller brands

have to pretend they are powerful and rich, and by doing so they end up with a very high break-even.”���

❧  “..For example, every brand must be present everywhere in the world.”���

❧  “…If the Japanese tourist cannot find his Givenchy or Aquascutum store when he visits Milan or New York, he may well conclude that these brands are weak and he might decide to stop buying them in Japan.” (Abstract from “Luxury Brand Management: A world of Privilege”)���

Page 20: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

capital requirement

❧ High marketing & management costs���–  Distribution Fees:���•  High rent to develop monobrand boutiques in

prestigious shopping areas ���•  e.g. South Korea’s Apgujeong; HK’s Tsim Sha Tsui

Canton Road���•  To develop global presence, 400 stores are needed to

cover the world!���–  High salaries for craftsmen���–  High investment for promotional activities���

•  e.g. Chanel’s elaborate runway shows during Paris Fashion Week; Louis Vuitton’s microfilm���

Page 21: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Exclusive Access to Suppliers & Distribution

❧ Many brands have acquired suppliers to protect competitive advantage and insulate against future rising supply costs���

❧ E.g. LVMH acquired two watch dial manufacturers – Léman Cadran and ArteCad SA, French artisan shoemaker Delos Bottier & Cie and haute couture manufacturer Arnys.���

Page 22: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Exclusive Access to Suppliers & Distribution

❧ More and more distribution access points are available to brands���❧ Contemporary areas like The

Bund in Shanghai brings a multi-sensory experience to luxury���

Value  Partners,  2007  

Page 23: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Potential retaliation from the existing companies

❧ Small luxury brands do not have high barriers of distribution���– Pressure from powerful groups to

prevent them from having access to multi-brand retailers���

Page 24: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

The five forces model

Porter’s Five Forces

Model

The Threat of New Entrants

Rivalry among

Existing Competitors

Suppliers’ Bargaining

Power

Buyers’ Bargaining

Power

The Threat of

Substitutes

High���

Page 25: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

threat of substitutes

Price of Substitutes���

Quality of Substitutes���

Switching Costs to

Customers���

Page 26: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

price of substitutes

❧  Rising popularity of middle price (“high street”) brands���

❧  Consumers tend to “trade down” during economic crises���

❧ Worldwide shipping of counterfeit goods from China���

Page 27: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

quality of substitutes

❧  Increased Internet accessibility of top luxury brand designs allow fast fashion brands to respond and copy trends within weeks after fashion shows���

❧  e.g. Zara, Steve Madden���

Page 28: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

switching cost to customers

❧ No monetary switching costs���❧ Loss of prestige if switch to

high street or fast fashion brands���

���

Page 29: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

The five forces model

Porter’s Five Forces

Model

The Threat of New Entrants

Rivalry among

Existing Competitors

Suppliers’ Bargaining

Power

Buyers’ Bargaining

Power

The Threat of

Substitutes

High���

Moderate���

Page 30: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

buyers’ bargaining power

Number of Buyers relative to Suppliers���

Level of Dependence on

a Buyer���

Switching Costs���

Possibility of Buyer’s Vertical

Integration���

Page 31: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

number of buyers

❧ Decreasing buyer concentration���–  Increasing number of buyers relative to

suppliers���–  Example: China’s emerging middle-

class buyers���•  Concept of “affordable luxuries” spreading in

second-tier cities & satellite towns���

–  Increasing number of wealthy households���•  Of the 1.6 million wealthy households, about 50

percent were not rich four years ago���

Page 32: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

number of buyers

Page 33: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

level of dependence on a buyer

❧ Luxury industry depends heavily on top-tier customers���

•  Average spending by luxury consumers rose by 30% in 2009���

•  MOST driven by small groups of super-affluent top-tier consumers���

❧ Top-tier customers eg. celebrities are usually early adopters and can drive consumption���❧ But not one single buyer can

determine prices���

Page 34: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

switching costs

❧  Buyers who develop an emotional attachment to the brand may have emotional switching costs���

❧  Increasing switching costs with the introduction of customer loyalty programs���–  E.g. LV’s VIP clients receive free gifts���

Page 35: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Possibility of backward integration

❧ Extremely low possibility���❧ Customers purchase luxury

products for direct consumption���– No business reason for backward

integration���

❧ Size of luxury companies usually way out of a buyer’s purchasing power���

Page 36: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

The five forces model

Porter’s Five Forces

Model

The Threat of New Entrants

Rivalry among

Existing Competitors

Suppliers’ Bargaining

Power

Buyers’ Bargaining

Power

The Threat of

Substitutes

High���

Moderate���

Low���

Page 37: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

suppliers’ bargaining power

Number of Suppliers

relative to Buyers���

Level of Dependence on

a Supplier���

Effective Substitutes���

Switching Costs (Switch

suppliers)���

Possibility of Supplier’s

Vertical Integration���

Page 38: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

number of suppliers

❧ Limited high skilled workers���❧ Skills shortage – retiring

craftsmen, not many youngsters willing to learn���❧ Couture-level embroiderers in

France: ~10,000 in 1920, dropped to ~200 now���

Page 39: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

level of dependence on a supplier

❧ Some key components and materials are outsourced ���– e.g. LV outsources its

monogrammed leather���– Chanel ordered a large bunch of

leathers from one supplier at one time in case they wouldn’t find a better one ���

Page 40: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

effective substitutes

❧ Highly specialized “atelier d’arts” with a narrow scope of expertise���– E.g. Feather-maker Maison

Lemarié, Costume jewellery and button-maker Desrues���

– Very hard to replace���

Page 41: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

switching costs

❧ Cannot easily switch to another suppliers���– Past cooperating experience is

important���– Risk a lower quality of products

after switching to new suppliers���

Page 42: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

possibility of forward integration

❧ Extremely low possibility���❧ Luxury companies, especially

large groups, are much more powerful and wealthier than their manufacturers���

Page 43: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

The five forces model

Porter’s Five Forces

Model

The Threat of New Entrants

Rivalry among

Existing Competitors

Suppliers’ Bargaining

Power

Buyers’ Bargaining

Power

The Threat of

Substitutes

High���

Moderate���

Moderate���Low���

Page 44: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

rivalry among existing competitors

Competitive Structure���

Demand Condition  

Exit Barriers���

Page 45: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

market structure

❧ Oligopoly���– A few large luxury groups

dominate���– Large number of small

independent brands���– “Big Three”���•  LVMH���•  Richemont���•  PPR Gucci���

Page 46: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

Top 10 Industry players

*Size  of  bubble=  Revenue  Bloomberg,  2012  

Page 47: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

demand condition

Country Growth in € (2011/12)

China 20%

Hong Kong 18%

The US 13%

Korea 13%

Middle East 10%

The UK 9%

Japan 8%

Russia 7%

Country Personal Luxury Goods Market Growth���

•  Demand will grow at a relatively high rate in the near future ���

Bain  &  Company,  2012  

Page 48: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

exit barriers

❧ Emotional Barriers���– Some brands may not break even

but continue operating due to a small number of extremely loyal customers and critical acclaim���

– E.g. Christian Lacroix ���•  Never made a profit for the 22 years

in operation���

Page 49: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

exit barriers

❧ Specialized Assets���– May be difficult to sell the highly

specialized supply chain components���

– E.g. Chanel has 6 atelier d’arts under it���•  Specialized machines no

alternative purpose ���

Page 50: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

The five forces model

Porter’s Five Forces

Model

The Threat of New Entrants

Rivalry among

Existing Competitors

Suppliers’ Bargaining

Power

Buyers’ Bargaining

Power

The Threat of

Substitutes

High���

Moderate���

Moderate���Low���

High���

Page 51: Luxury Goods Industry Analysis 2013

The Luxury Goods Industry 2013

conclusion

❧ Luxury remains one of the best-performing, highest-growth sectors���

Pwc,  2012  

Page 52: Luxury Goods Industry Analysis 2013

The End���


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