While ‘luxury investment’ may be nonsense, ‘luxury value’ is not.

LONDON — We, in the luxury industry, are masters of the art of “managed scarcity”— and yet, the majority of our products are made in volume. While luxury goods have certainly not become “commodities” as some have suggested, they are not investments in the true sense of the word either. For even if there is significantly more residual value in luxury goods than in other sectors, they too depreciate in value the minute they are sold. “Investment luxury”, then, is clearly a misnomer.

One interesting niche in which investment and luxury do come together is where discerning collectors combine their interests in vintage jewellery, watches or cars with some investment rationale. Where supply is limited and depreciation is not a factor it can be possible to make a decent return, although it is far from assured. These purchases are what Marc Cohen of Ledbury Research calls “investments of passion”.

Perhaps in the context of luxury, “investment” is used to mean “lasts longer”. As Angela Ahrendts of Burberry said recently at the Reuters Global Luxury Summit, “There [are] two parts to consumer sentiment (at the moment). One is price, but the other is a return to things that are timeless, lasting and where there’s a return – a long return – on the investment you’re making”.

Although there is plenty of data to support the current trend towards more classic products, is this anything more than a short-term reaction to the recession? Or, is a much deeper shift occurring in terms of the value to price equation? This question goes to the heart of one of the key issues facing the industry, something I have called “The Challenge of Value (for money) & Values (integrity, provenance)”, which has three contributing factors:

1.Gradual cutting of corners on inherent product quality.

2.Misdirection of design talent (which at its best is a very significant contributor to value) from genuine innovation to mass interpretation of fashion trends and multiplication of seasons.

3.Over-reliance on the brand as the guarantor of quality and value.

It is this last point that leaves us with the biggest dilemma. The central pillar of the post-war luxury business model has been the significant investment in the status of the brand because it spreads ”exclusivity” over the many. If the brand can build up its power and prestige while maintaining quality (and therefore value), all is well. But can it? And if not, does it really matter?

I have long argued that this is ever more difficult to achieve, and furthermore, that this does matter, because of its increasing importance to consumers. Those familiar with my “Discernment Curve” theory (see box) will know my suggestion that shifting tectonics of consumer attitudes and behaviour mean purchasing decisions are increasingly driven by growing sophistication and knowledge.

Echoing a sentiment Pam Danziger of Unity Marketing hears regularly from her focus groups of affluent Americans (as in her most recent study conducted in Beverly Hills, May 2009): “The rich didn’t get rich by paying more than perceived value.”

Other studies further support her findings. In research conducted among affluent consumers in the first quarter of this year, Milton Pedraza of The Luxury Institute in New York found that, “‘Superior quality, craftsmanship and customer service’ are by far the three qualities that wealthy consumers most commonly associate with a luxury brand,” and that “more than two out of five wealthy consumers believe luxury brands are becoming a commodity.”

According to a report made for Lamborghini by The Future Laboratory this January surveying HNWIs worldwide, a vehicle deemed “expensive” (£100K to £120K – or $165K to $198K) makes 23% of HNWIs less likely to buy it. By contrast, the perception of a luxury vehicle being a ”worthwhile” and valued purchase makes 36% of them “more likely” to buy it – and 29% of them “much more likely” to buy it.

Marc Cohen sees a strong thread of similar findings, but cautions that this isn’t that new. The search for superior quality to justify price is “a fundamental”, and “shouldn’t be confused with an apparent ‘trend’ towards classics” fuelled by the downturn.

In other words, value has always been important to luxury consumers. However, as Dawn Coulter of the brand strategy and consulting firm Dawn’s Gone Shopping says, “it is subjective”, and varies according to disparate types of consumers in different markets. Qualitative work such as the DNA of Luxury study has long supported this. However the lack of quantitative data has made it easy to dismiss value as a clear factor – especially when it appeared not to concern consumers new to luxury. Hence, greater emphasis was placed on “selling the dream” than the product.

The really interesting question is how much this will matter in the future. The argument that the recession represents a revolution in consumer perception and behaviour is not a convincing one, foremost because most of these trends were around before the crisis hit. In addition, it is very likely that in a few years we will look back and see that “irrational exuberance” has reasserted itself – especially when emerging economies are taken into account. Once again, many consumers will purchase primarily on brand or image.

The crucial issue for leaders in our industry is not whether there is another opportunity to tap into a gold-rush of spending. Rather, they need to be concerned with the following challenges:

1.Sooner or later, the “Value and Values” questions will likely become more widespread as we journey further along the Discernment Curve. Hence, it is best not to slip back into bad pre-crash product quality or brand integrity habits.

2.It will become increasingly difficult to successfully produce both entry-level and ultra-luxury, as there is an inherent conflict between the two. This is exposed the more you talk up the better stuff and the more consumers find out (especially online). Better to focus on your primary “value promise”, define it clearly and do it really well (and unapologetically).

3.The market has long been fragmenting into different types of businesses, brands and categories and is therefore becoming more confusing for the consumer. The more you can be a category or product specialist, the better.

4.We need to better understand how consumers view value in the context of luxury, especially the younger affluent (including the “Millenials”); how mature markets are differing from the newer ones; and how the Baby Boomers’ spending habits are changing as they age.

5.Finally but most urgently, we need to find a new language to communicate how our products offer lasting value. No longer will it suffice to rely primarily on brand imagery. As Pam Danziger says, “think more like Consumer Report than Vogue.”

To sum up, while ”luxury investment” may be nonsense, “luxury value” is not. The industry as a whole may grow strongly again but there will continue to be sharp discrepancies in fortune between brands. My money will be on those for whom delivering value remains as important when the good times return.

Guy Salter is Deputy Chairman of " target=“_blank” title=“www.thewalpole.co.uk__”>Walpole