Jean-Noël Kapferer, brand strategist and author of ‘Kapferer on Luxury’, deciphers some key brand concerns and offers a rare insight into what lies on the horizon for the luxury set.
As an internationally recognised thought leader on brands and brand management who has, and continues to work with an impressive line-up of global corporations – Jean-Noël Kapferer is certainly living in interesting times.
It could be argued that never before have markets, currencies, online and offline commerce and consumer buying habits converged to create as fascinating and complex a business environment as companies now have to navigate.
For many brands, and particularly luxury brands, this means it’s time to re-examine their past and existing strategies and put together the pieces of the puzzle to find out where the market is going and what will work next.
In this arena, Kapferer is king.
As the author of of more than one hundred articles, and 12 books – including the international best seller ‘New Strategic Brand Management’, ‘Reinventing the Brand’, ‘The Luxury Strategy’ and, most recently, ‘Kapferer on Luxury’ – and a professor at HEC Paris, Kapferer has made it his mission to decode the times and devise strategies to take brands successfully into the future.
Here, he offers a rare insight into his strategic thinking and what lies on the horizon for the luxury set.
“ Luxury has never been created to fulfil such large demands ”
My first question is, really, can we realistically expect the luxury industry to continue to grow in the same way that we’ve seen in the past decade?
Part of it will, and another part will not. There will be a segmentation. Obviously, the funny thing is that luxury, normally, should have remained a niche, small sector.
However, luxury is, much like the car industry and the real estate industry for example, very clearly identified. There is no doubt about where it starts and where it ends. In what we are talking about, that is – personal luxury goods, pleasure, leisure, etc – there is a deep change, which is not new by the way, which is the fact that luxury is symbolized by brands.
In high luxury, it’s the product which is really luxurious. Take Rolls Royce, whether it’s called Rolls Royce or Bentley or whatever, it is a luxurious product. But now, in other parts of luxury, for example in personal luxury goods, the brand has been mostly imbued by tangible attributes of prestige, glamour, fashion ability, etc. which allows the brand to cover products which are not really luxurious products.
That creates a fantastic profitability, and this is why Bernard Arnault himself [CEO of LVMH] once said a sentence which we now always remember: “Only luxury gives us luxurious margins”. It has become one of the most profitable sectors because of the leveraged effect of the brand. Once it has acquired a specific status that is.
“ Luxury is symbolized by brands ”
But what happens is, it’s very difficult at that point then to resist the pressure of Wall Street because, generally when you reach a high volume, you are no longer a family company. You need a lot of cash to open new stores everywhere in the world. You need a lot of things to do marketing. Either you go directly to Wall Street and you need to become public, or partly public, or you join a group which is a source of cash. But then you come under the pressure of increasing your volume, or at least your revenues, by 10% per year regularly.
That pressure has no end. It’s very difficult to say: “No, are we not growing more”. I think that’s the sector itself. I’m not talking about the concept, I’m talking about the sector itself, which now is under pressure, and only a few will be able to say: “Okay I will grow, but only in value, no more in volume”.
For example, I recently met the Communications Director of Rolls Royce for Europe and he said: “Next year we will sell one more car than this year, yet our sales will grow by 20%”. How? Because all Rolls Royce will be fully customised. And, as soon as you customise a Rolls Royce, people are ready to pay 20 or 30% more, they don’t care.
So, I expect that kind of segmentation to emerge in the luxury industry.
How do you cope with these pressures I mentioned? Either you cope by increasing value or you cope by addressing more people. The problem is that there are more and more people who want to sit at the table, at the banquet. Luxury is like a restaurant table. Lots of people want to sit at this table.
The demand is growing, so how do you cope with that? Especially when that was unexpected. Luxury has never been created to fulfil such large demands and yet that’s what makes the sector grow today.
LVMH-owned Louis Vuitton
On the topic of LVMH – last year, their profit was €5.6 billion but people continue to pressure them to grow, as you say, because there is a pressure from shareholders to continually grow. At what point is somebody going to say: “€5.6 billion in profit is sufficient, and we need to protect the brand’s exclusivity”?
Nobody can say that because LVMH is a public society, that is to say – they have a lot of shareholders.
Now, in luxury, a lot of people want to buy shares of what they see as this ‘golden egg’ and expect return on their investment. They say: “Okay what’s going on, how much will you make next year?”
As long as you remain a family company, like Chanel, you can resist. You know the Wertheimer family – they are not upset with 10% per year, they are so rich they feel long term. I don’t think the Wertheimer’s come and say: “Hey I didn’t get my 12%”. They have made Chanel what it is because of this long-term vision. But long term is only possible when you remain independent, and it is difficult to remain independent when you are publicly owned.
I don’t think it’s a problem, as I said – there will be segmentation, there will be brands which are accessible luxury, and there is nothing wrong in it, but there are others which will say: “We will limit volume, but increase value”.
“ The internet is a fantastic tool brands can use to refuel the dream ”
In that case, what about luxury brands which might not necessarily communicate on rarity, but give us the impression that they are rare and special, whereas the sheer volume of products available on the market from these brands suggests otherwise?
It’s not so much the volume as it is visibility. In any case, luxury brands should never communicate, because as soon as you communicate, it’s as if a chef in a three-star Michelin restaurant has given you the recipes and said: “Come in the kitchen, you will see how I make the stuff”.
But coming back, as I said, I don’t think it’s so much about volume, as it is about visibility.
For cars which are more and more expensive, visibility starts in the sense that – you don’t need to have a 100 Ferraris in the street for people to say: "Look there are Ferrari’s”. If you see 10 or 20 in a day, you already say to yourself: “What’s going on here?” Of course for apparel or accessories, you need much more out there for that to happen. But it’s visibility which is a problem.
But then, we have to balance and remember that luxury now also has to be visible, if you want to capitalise on the value, so that is also important. For example in China, the Chinese may go to the restaurant and buy a Cognac bottle, but they don’t buy a 1L or 75cl, they buy 2L or 3L so that on the table everyone sees that they wealthy. So there is the ostentation, dimension of luxury which increases.
“ E-commerce can decrease the ROI of the physical stores ”
In your book, you talk about the internet and how digital has changed the communications paradigm and created more and more visibility. So then, at what point should luxury brands perhaps start limiting visibility, particularly via digital avenues?
Well, the internet is a chance for luxury, because in order to maintain the dream value of the brand, you have to permanently refuel that dream. Refuelling the dream means creating content, content, content. Internet, social networks, making events known, letting people have images from the backstage, etc, is an opportunity the internet gives brands – because not everybody is going to look at a Vogue anymore, or maybe they will, but the digital Vogue. So, in that sense, the internet is a fantastic tool brands can use to refuel the dream.
Too much e-commerce, however, can lead to problems arising.
One of these is that e-commerce can decrease the ROI of the physical stores – which have traditionally, fuelled the dream. So there is the problem of how to manage the equilibrium between internet sales and physical sales.
Then, you have the issue that, with e-commerce and digital, as I see it – if you have a very good digital agency and if you have a very good e-commerce provider/site – whether you are accessible luxury, mass prestige, or high luxury, there are now agencies in the market which can deliver a fantastic internet experience.
So, in the end, whether you are Zara, Celine or Vuitton, these agencies and e-commerce providers can help you to develop the best experience on the net. But then, because of that, the difference between brands is narrowed, because it’s like advertising identity.
If I have an average brand and I go to one of the best advertising agencies, they will create fantastic advertising. The difference compared with Cartier advertising then, for example, could be narrowed. On the net the power of these creative digital agencies is that they can make even brands which are not luxury, look a little like luxury. So therein lies the problem of differentiation.
With stores, though, there is no problem of differentiation. They may or may not be on the same street and buildings, but it’s not the same impression. So, I see the net as an occasion for non-luxury brands to look like luxury much more than before. What else can I say about it?
The other thing that the industry has been talking a lot about recently, which you also address in your book, is the discussion of pricing. Chanel, for example, is moving towards having global pricing for some of its handbags. Can you tell me more about that?
The pricing difference has created a huge intake in business, because shopping expeditions happen where the prices are low. The Chinese go first to Hong Kong – why? Price difference. Then they go to Macau. Why? Price difference. Then they even go to Tokyo and finally, they go to Paris.
Part of the answer for me, is custom, so you have to find – not the same price – but more or less, a narrower range of difference.
“ You should always raise the price, because [as a luxury brand] you are a dream ”
Do you think that other luxury brands will follow suit?
Well, yes, but it depends. If you take the watch industry, they don’t have stores, it’s more of a wholesale business. They have got some stores, okay, but it’s not primarily a very good stores’ business, it’s mostly a wholesale business. When you are a wholesale business, it’s different, but it’s when you invest in a four-story building because you are Armani and it’s a cathedral, and it’s mostly empty, that you say at the end of the day: “Well — how will we make the money when the customers go in Milan?”
It’s difficult as well, because these companies are often also in league with local partners, which could invest and expect return in that country, and you cannot just say: "Well thank you for investing my friend, but the Chinese are now buying in Milan”. That’s an issue, a lot of the stores are co-owned, because brands, in order to develop, look for local investors who are looking for local ROI, so they have to find a way to make that work.
Definitely. A lot of luxury brands seem to increase their prices annually also, for reasons that I’m not 100% sure that I understand.
By definition, a luxury brand has to increase its price. That doesn’t prevent it from having access prices, but on average, the price will go up every year.
In September, Rolex always warns that it is increasing its price. If you look at it and search on Google: ‘Rolex price increase’, you’ll see that in September it always increases its price.
Why do luxury brands increase their price regularly and without any justification? Because, in luxury you never justify what you do, you say: “That’s just the way it is”.
One main reason for that is that consumers cannot dream of something which is more and more accessible. And when people are getting richer and richer, because there is a middle class whose salaries and wages go up or whose consumptions go up, etc – if you don’t increase your price, there is a moment where you become really accessible. So something that is $10,000 is no longer that far out of reach… and so that thing that was $10,000 should be now sold at 12 or 13 [thousand].
And you should always raise the price, because [as a luxury brand] you are a dream, so be at the limit; and if the consumers – or some consumers – are making more money, well what was inaccessible becomes accessible and then you are no more a dream. You are too accessible. So, this is why prices go up regularly. It’s a way for luxury brands to keep selling the dream.
“ Luxury is the measure of yourself. Luxury is also the measure of the moment. ”
At what point will consumers start to think more about value, or will they at all?
Value is not the product value, there is no relationship between the product value and the price. We are selling the positioning of people, the social comparison, that the value you pay is your value. It says, I am able to put a lot of money, beyond value, I am able to buy something without caring about whether it is 10 times the value of the product itself.
When you buy Dom Perignon, it’s €150 a bottle. Okay, first you have to pay the distributor, the store, the retailer, etc. But Dom Perignon is a statement. When you say, okay let’s have a Dom Perignon tonight, it means it’s a great moment, I love you all and we will sacrifice a lot of money and because it is a moment which is extremely valuable and we need to put on the table something which is at the level of the moment, which is at the level of the people there with me.
You don’t ask yourself, well what’s the real value of the product? This is why the luxury market is so much a gift market. Because the gift is a measure of the love or friendship that you have, or respect that you have with some person.
Of course some cultures are very much value oriented – for example, if you take the Americans, they are always saying: “Well is it a good deal? Can I sell it more? Can I resell it in two years and make a profit?” There are some cultures which are more value oriented, they are always looking for a good price.
By comparison, in Asia they are looking for statement, because they are coming from countries where everybody was like everybody, like in China – everybody was like everybody. It was very conformist. Now, what luxury did is, allowed them to differentiate themselves a little. They are able to show where they are on the ladder. That’s part of economic growth. Before everybody was the crowd, the people of China. Now, they are the individuals of China.
Luxury is the measure of yourself. Luxury is also the measure of the moment. The measure of the emotional intensity of the moment. It’s like a ring, a diamond ring – it’s a measure of value.
The whole of luxury is partly about products, but it’s also a lot about social relationships.
There’s been a lot of talk about Brazil and India in the last few years in terms of markets with potential, but the local market hasn’t really taken off, I suppose due to for a lot of political and economic reasons. What’s your view? Are there growth opportunities in those regions for luxury?
As you know we have been talking about India for at least 20 years and my feeling is, this will not really take off.
One – they have created an economy which is an internal economy and which resisted a lot, with very high customs, to the importation of Western goods.
Second – there is a high lack of infrastructure. So there are no luxury malls, there are not even Walmarts. There are no roads, there are no malls, so there is no retail – at the level you would expect for luxury goods. So most of the luxury brands now are in the halls or malls of hotels, so they are not visible to a lot of people, so they cannot really inseminate the dreams of India. The take-off of India in terms of luxury will be slower than expected.
Finally, in India, I feel they already have their luxury.
They have many skilled craftsmen, which are still based in Mumbai. So, they have the skills, they have the know-how… the Maharaja didn’t wait for Cartier to have jewels!
In Brazil, I think – and I’m talking on the basis of studies I am reading and not myself alone on an island talking – I think the rich Brazilians go to the States. They put a lot of money there and they live in Miami six months per year. It’s part of the booming luxury market in the USA. There is a problem of security in Brazil also. So, it’s starting there, but much more slowly than expected.
“ Many brands have now become experts in artificial rarity ”
Finally – do you personally believe that luxury brands can continue to grow and still remain rare, still remain desirable?
I believe many brands have now become experts in artificial rarity. That is, you could say that part of luxury could be renamed: ‘The art of artificial rarity’.
What is artificial rarity? Well, if you create immediate rarity – that is to say something like: “You have two days to buy it and then there’s no more” – you are creating the conditions for something which is very artificially limited in supply. That has nothing to do with the beauty of the object, etc. It’s a little like when Apple launched the new iPhone. There were thousands of people queuing because they don’t know how many there would be the first day. So they were queuing because they wanted to be first. That has nothing to do with what the product actually is in a way.
So there will be, I think, a number of brands which will be very happy to attract the massive general demand with that kind of artificial rarity. I have no problem with it, it’s just that you have to call it what it is, artificial rarity.
When you have Hermes, by comparison, the fact that you wait six months or more for having ‘Kelly’ bag is not due to artificial rarity, it’s because they don’t have enough craftsmen and it takes one month or three weeks to make one bag. Hermes cannot just create 2000 craftsmen just to meet demand, because the craftsmen need two or three years to be trained. Also, to train the craftsman you are taking time from another craftsman who will in fact, therefore, produce less as they train the new one.
So this is something called a ‘production bottleneck’, which is not artificial, but which is, in fact because of the art of the product. If you ask a painter: “Oh can you do a painting in half an hour?” He will say: “I’m sorry, but I’m not McDonald’s. You know, it’s not a fast painting shop”.
But there are people who are able to do this. So, I think we will have to separate the wheat from the chaff, and there are some brands which will have real rarity and some brands which will surf on the artificial rarity wave. Both will make money, but I think long term, only the first one will survive.
For more in our series of conversations with Luxury Leaders, please see our most recent editions as follows:
Additional editing by Daniela Aroche, Editorial Director of Luxury Society
Published on June 25, 2015 under Leaders
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