Shock of the New Chic: Dealing with New Complexity in the Business of Luxury

Shock of the New Chic: Dealing with New Complexity in the Business of Luxury

          
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Shock of the New Chic: Dealing with New Complexity in the Business of Luxury

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    New Customers—and The New Ways They Buy

    Recently, a wealthy Chinese individual spent $1.5 million on a luxury travel package that will take him to nearly 1,000 UNESCO World Heritage sites during a two-year trip. Meanwhile, his son, who had just bought his second Piaget watch, signed up to dive with hammerhead sharks.

    These stories about the two men and two very deluxe experiences drive home two critical points about the changing face of luxury. First, the kind of luxury experiences, customized to their individual needs and interests, that both men are planning to enjoy are becoming increasingly common—and more and more of them are arising in the emerging world, from places such as Chengdu, Jakarta, and Santiago. Second, while the son still buys plenty of luxury goods, the father says he now favors experiences over new “things.” The different attitudes signal the importance of identifying and serving more detailed customer segments than has been typical of traditional market-scoping efforts. Both points deserve closer scrutiny.

    To Infinity and Beyond: The Next Frontier of Luxury Travel,” LuxurySociety.com, September 4, 2013.
    The Shift Toward Luxury Experience

    Worldwide, luxury is shifting rapidly from “having” to “being”—that is, consumers are moving from owning a luxury product to experiencing a luxury. BCG flagged this trend in its 2012 Focus report, Luxe Redux: Raising the Bar for the Selling of Luxuries. Experiential luxury, such as exotic holidays, gourmet meals, and art auctions, now accounts for 55 percent of global luxury spending. Sales of experiences also outpace product sales: BCG’s research has found annual growth in the category running at 14 percent compared with 11 percent for sales of personal luxury products such as watches, jewelry, and handbags.

    Within experiential luxury, growth levels of individual sectors have varied, with the technology sector achieving the highest compound annual growth rate: 25 percent. This is not altogether surprising given the nearly universal strength of technology brands today. In BCG’s 2013 Consumer Sentiment survey, affluent consumers praised Apple as the “most aspirational brand” in Canada, France, Germany, Italy, Spain, the U.K., and the U.S. Sony was in the top 10 in six of these seven countries; Samsung made the list in five of them. Yet Chanel, Dior, Gucci, and Louis Vuitton ranked in the top 10 in only a few of the countries. (See Exhibit 2.)

    exhibit

    Consumers in emerging markets such as China and India are also rapidly shifting to high-end experiences, although spending on such experiences still represents a small portion of total luxury expenditures. BCG’s 2013 Global Consumer Sentiment Survey revealed that 29 percent of consumers in China prefer enriching experiences over products, versus 51 percent of consumers in the U.S. (For more about the Global Consumer Sentiment Survey, see The Resilient Consumer: Where to Find Growth amid the Gloom in Developed Economies, BCG Focus, October 2013.)

    This reflects a natural purchasing trajectory: newly affluent buyers tend to amass tangible goods that show off their wealth. “The new Indian luxury consumer is pursuing a lifestyle where owning exclusive items and owning them first is a clear sign of wealth and power,” a senior executive for Lamborghini told Reuters. Those who have acquired the “things” they want tend to move on to one-of-a-kind experiences that they can share with others.

    In addition to this maturation in the consumption cycle, the move from “having” to “being” is driven by demographic factors. Baby boomers, now into retirement, are leading the way. As the first real purchasers of “democratic luxury,” these sixtysomethings and seventysomethings already own the watches and cars they want, so they seek enjoyable and often novel experiences on which they are prepared to spend handsomely. Falling in line behind them is the Millennial generation—those in their twenties who are geared to pleasure rather than possessions. To these young people, owning something usually comes second to sharing new ideas and new experiences.

    Luxury companies must embrace these key trends in the following three ways.

    Enter the true luxury-experience categories. Luxury experiences are no longer limited to special occasions—the high-end restaurant, the deluxe spa, the yachting vacation, the private safari in Botswana. Now they are expanding to touch more of a consumer’s everyday activities.

    Consider the branding and expansion of services ranging from superior dining to cosmetic surgery and exercise classes. Such services have several characteristics in common. First, they consistently enjoy demand that outstrips supply; waiting lists are long, and the lists themselves further spur the brands’ desirability. Second, the services’ pricing is far north of what is charged for functional versions of the same offering. Third, these “experience” brands regularly have a celebrity following. For example, Mick Jagger sometimes dines at New York City’s Café Boulud; actress Katie Holmes takes indoor cycling classes at SoulCycle. Fourth, makers of luxury products gladly tie their offerings to the experience brands. For instance, cosmetics brand Clarins collaborated on a summer offer with Barry’s Bootcamp, a high-end U.S. fitness studio.

    SoulCycle is an excellent example of an “experience” brand that is reaching the everyday. Founded in 2006, SoulCycle offers high-energy indoor-cycling classes designed to help people enjoy working out; the instructors themselves have star billing. Priced at $30 to $40 a class, SoulCycle’s activities come in tiers of service. The SuperSoul series offers 50 classes for $3,500 (which comes to more than twice the regular price of a single class), and the package comes with early registration and priority placement on waiting lists. SoulCycle uses plenty of social-media marketing, with the instructors tweeting and using Facebook to energize customers—and of course to spur demand for their classes. The company also sells plenty: it offers its own branded attire and has strategic ties to established luxury-goods firms.

    Similarly, a number of high-end metropolitan hotels are expanding their offerings beyond mere hotel rooms to featured experiences. For instance, some organize exclusive events such as fashion shows, art gallery tours, or wine tastings that help their guests enjoy the city. Furthermore, some luxury automakers, noting that their exotic vehicles often sit in garages or are quickly resold after purchase, are striving to enhance the experience of owning their vehicles by offering selective memberships with perks to keep owners behind the wheel and talking about their cars.

    Enrich the selling process. Turning sales activities into deluxe experiences in their own right is nothing new. But the practice is reaching new levels of excellence across a widening range of luxury segments—from automobiles to fashion—and across all channels. The intent is clear: to help consumers better connect with and experience a brand.

    Customization is one “selling experience” technique. After customizing a desired model online, a Bentley buyer can track the manufacture and distribution of his or her car in real time. At least one maker of exotic cars invites its purchasers to its manufacturing facilities to participate in the experience of building the vehicle.

    Burberry provides an even more sophisticated experience that spans several sales and marketing channels: its Runway Made to Order customization service. Just after its autumn show, the company offered a two-week window in which to order its Prorsum bags and outerwear online or in stores. Consumers could order items with a personalized engraved nameplate; during the nine-week turnaround period, they could view, on their smartphones, original sketches and videos of their item being constructed. They are slated to then receive their purchases before the collections arrive in stores.

    Neiman Marcus has its NM Service, a personal shopping app that lets customers interact directly with “their” sales associates. Once a customer downloads the app, she receives access, via her smartphone, to a preferred personal shopper who can give advice live or set aside specific products for the customer to try on during her next store visit. When the customer enters the store, the NM Service launches, informing the preferred personal shopper, who can then greet and wait on the customer. The app also highlights upcoming store events, new product arrivals and sales, and emerging fashion trends.

    Elsewhere, Louis Vuitton has taken experience selling to another level—literally—with an invitation-only floor in its new super-luxury “maison” shop in Shanghai. Geared to China’s super-wealthy, the floor is decorated like a deluxe private residence. When shopping there, customers can have their hair styled while an artist designs personalized bags for them.

    These examples just begin to explore the nearly endless range of possibilities. Brands can do much more to reinvent in-store service and to add experience to the selling process so the “theater of the brand” transcends the physical store.

    Participate in new “experiential” business models. Recently, there has been a surge of innovative business models in which the experience of “sampling” luxury brands is the product. One such approach is the rental or subscription model. In the fashion and accessory category, the approach has been realized in new businesses such as Rent the Runway, Lacquerous, and Bag Borrow or Steal, whose “members” enjoy high-end fashion products for as little as 10 percent of the retail price.

    Rent the Runway allows women to rent designer clothes and accessories. Rentals range from $50 to $200 for a four-night loan. Lacquerous presents itself as “a new club that allows you to try and wear the latest in red carpet and runway nail trends without splurging on a full bottle every time.” Bag Borrow or Steal offers a similar service in handbags, jewelry, and other accessories. Together, these three brands boast more than 3 million members and offer access to products from 170 designers.

    Although some see such businesses as democratizing luxury—perhaps even diluting the participating brands—the new model clearly resonates with consumers, especially Millennials.

    Similarly, customers can subscribe to receive boxes of fragrance and beauty samples. The emphasis is on the experience; Birchbox appeals to the thrill of discovery. Launched in 2010, Birchbox was one of the first startups to jump into the subscription-based business of selling fragrance and beauty products. For a $10 monthly fee, subscribers get a monthly package of four to five samples. Many customers have signed up to multiple so-called beauty box services; some admit to being hooked. There is even a blog called My Subscription Addiction to cater to this new demographic. Others cannot resist putting their “unboxing” experiences on YouTube.

    This model also lends itself to social media. Rent the Runway recently introduced a social-shopping platform, Our Runway, which allows women to shop based on user-generated photos of real women with body types similar to their own. And the model even translates into the physical world: Rent the Runway now has showrooms in Manhattan.

    Some traditional luxury-goods brands and retailers have started to catch on to the power of these subscription models for marketing, driving conversion, and capturing data; a few are partnering with the startups to bring experiential consumerism to their shoppers. U.K.-based department store Harrods has teamed up with Glossybox to offer a curated box of sample sizes of cosmetics brands that Harrods already carries. One promotion gave subscribers a 20 percent discount at Harrods for the full-size versions of the products.

    India’s Flashy New Rich Drive Luxury Car Boom,” Reuters, January 3, 2012.
    Why Millennials Don’t Want to Buy Stuff,” Fast Company, July 13, 2012.
    SoulCycle Is a Booming Exercise Chain for the 1 Percent,” The Daily Beast, July 19, 2013.
    “Neiman Marcus Introduces NM Service, a Personal Shopping App,” Neiman Marcus press release, March 1, 2012.
    Seeking a Solution, One Tiny Tube at a Time,” New York Times, October 31, 2012.
    The Push for More Detailed Segmentation and Customization

    If the 1990s was the decade when luxury brands began to reach broader segments of society, now is the time when luxury markets are fracturing again—although not along the usual fault lines.

    Twenty years ago, luxury consumers were a more homogenous group. The single greatest factor that united them was their keen interest in accumulating logos as visible signs of status and wealth. Today, these same consumers come from all over the world; they are more educated about brands, more sophisticated in general, and much more demanding. They are likely to shop across multiple channels, and they routinely communicate online. Importantly, they are anything but homogenous—meaning that yesterday’s age-bracketed or geography-specific market labels matter far less.

    Consider the “Chinese consumer” segment. In practice—as many leading luxury brands have discovered—grouping all the luxury consumers in China into one segment makes no sense. While some generalizations may still apply, there are dramatic differences in China that transcend the already huge economic variations across regions and across cities. (See Exhibit 3.)

    exhibit

    One example of the new and better segmentation is the so-called Sugar Generation. The label describes China’s affluent young consumers who have grown up with abundance. They have been exposed early on to luxury brands and lifestyles, so their expectations and buying habits are “prewired.” BCG estimates that the Sugar Generation now accounts for 13 percent of China’s affluent population—and that it will grow to more than 30 percent within five years, as the “wealth history” of the average Chinese family becomes longer.

    Both women and men in the Sugar Generation espouse very different buying habits than, say, China’s successful entrepreneurs do—most of the latter group are men and many of whom are the parents of Sugar Generation children. These young people know much more about luxury brands, and their purchasing behaviors are spread across a greater number of luxury categories, including experiential luxury. (For more information, see The Age of the Affluent: The Dynamics of China’s Next Consumption Engine, BCG Focus, November 2012.)

    So what do such newly revealed market segments mean for luxury brands and retailers? Unlike mainstream consumer companies, many luxury firms have kept their distance from formal consumer research and analytics. Some might say their preference for “art” over “science” has indicated aloofness—perhaps even skepticism—for proven methods. Yet, for more than a few luxury firms, fierce brand protection and a defense of creative approaches seems justified by the considerable success that the firms have achieved.

    Although BCG agrees that consumer research should never detract from the importance of creative, brand-enhancing product strategies, we contend that the formulas for success have become much more complicated. Luxury brands can now benefit significantly from consumer research that can yield fresh insights about market segmentation and go-to-market approaches. Such insights should inform decisions about store assortment, levels of in-store service, allocation of marketing spending, and pricing.

    The research can also help companies respond to complex and fast-changing challenges such as understanding the life cycle of consumer values—that is, learning to distinguish the values that are becoming less prominent (ostentatious luxury), today’s dominant values (uniqueness, craftsmanship), and the emerging new values (sustainability, experiential luxury).

    Because richer segmentation is needed to properly understand the new directions in which luxury markets are headed, BCG is working closely with Altagamma Foundation to derive unique customer insights based on deep research of more than 40,000 consumers in 20 countries. The first release of the report will be presented in the first quarter of 2014, and it will be updated annually.