Presented by: Stephanie So, Evan Lui, Vanessa Yau, Richard Kan & Trevor Li
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���
The Luxury Goods Industry 2013
characteristics of luxury products
“The Concept of Luxury Brands”, 2012
INDUSTRY BACKGROUND���
The Luxury Goods Industry 2013
Global Market size
Bain & Company, 2012
The Luxury Goods Industry 2013
growth by geographic markets
Pwc, 2012
The Luxury Goods Industry 2013
Growth by product category
Pwc, 2012
The Luxury Goods Industry 2013
recent trends
• Globalization – over 40% of sales is from “luxury tourism” ���
Bain & Company, 2012
The Luxury Goods Industry 2013
recent trends
• Globalization – plenty of untapped potential in emerging markets���
Bain & Company, 2011
The Luxury Goods Industry 2013
recent trends
• Consolidation – individual brands are bought up by large luxury groups���
Bain & Company, 2011
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
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
INDUSTRY COMPETITIVE ANALYSIS���
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
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
The Luxury Goods Industry 2013
brand loyalty
❧ Brand image and CRM programs build high brand loyalty���
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
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���
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”)���
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���
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.���
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
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���
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���
The Luxury Goods Industry 2013
threat of substitutes
Price of Substitutes���
Quality of Substitutes���
Switching Costs to
Customers���
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���
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���
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���
���
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���
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���
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���
The Luxury Goods Industry 2013
number of buyers
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���
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���
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���
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���
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���
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���
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 ���
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���
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���
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���
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���
The Luxury Goods Industry 2013
rivalry among existing competitors
Competitive Structure���
Demand Condition
Exit Barriers���
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���
The Luxury Goods Industry 2013
Top 10 Industry players
*Size of bubble= Revenue Bloomberg, 2012
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
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���
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 ���
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���
The Luxury Goods Industry 2013
conclusion
❧ Luxury remains one of the best-performing, highest-growth sectors���
Pwc, 2012
The End���