Mark Twain reportedly once quipped "Rumors of my death have been greatly exaggerated." The same could probably be said of the luxury industry. Everywhere you turn these days, someone, somewhere is proclaiming "the death of luxury", "the end of luxury" or some variation on the theme. While this type of hyperbole may grab attention, it's not exactly helpful in understanding the changes currently afoot in the industry. Moreover, it ignores the fact that historically, luxury has always gone "under the radar" in times of economic trouble. While the industry is obviously not immune to economic forces as some had previously suggested, it's not likely to fall off the face of the earth either. Milton Pedraza, Founder of Luxury Institute graciously accepted to speak with us about the state of the luxury industry and this years's survey entitled: The State of the Economy and Trends in the Luxury Industry. The survey sheds light on the current situation and provides some much needed perspective.
1. The Luxury Institute's WealthSurvey goes back how many years?
I founded the Luxury Institute, LLC in 2003 and we began developing our surveys in 2004 so it goes back five years. Each year we've focused on a different topic. This year, because of the current state of the economy, we decided to focus our first WealthSurvey on the state of the luxury industry. There are many myths currently being perpetuated and a lot of hype. We wanted to separate fact from fiction based on the voice of the high net worth consumer.
2. We often hear commentators proclaim that "luxury is dead". Is this the kind of myth you had in mind?
Exactly. Many luxury brands have been around for several generations or more and have experienced previous downturns brought on by recessions, wars, and other macroeconomic dislocations. Yet, they're still around. During the economic boom, many in the industry thought that the growth would go on indefinitely, but luxury is, and always has been, cyclical. This is what we're seeing now.
3. Would it be accurate to say that over the past ten years or so, the luxury industry had become somewhat bloated and that the current economic crises is effectively acting like a correction on the industry as a whole?
That's correct. There are many brands that were calling themselves "luxury brands" that were not in fact true luxury brands. Many luxury brands were offering products that were not in fact true luxury products. For instance, product ranges that were aimed at aspirational customers or the "masstige" market like keychains and other products of low quality or low prestige value.
As long as times were good and everyone was doing well, things were fine. But you need to look at the luxury market as having three tiers: The bottom tier is made up of young professionals who are just starting out and haven't yet accumulated a significant net-worth. They were the first to feel the pinch of the downturn. This segment of the market is gone - they're no longer spending much on luxury goods. The next tier of consumers is comprised of single-digit millionaires, younger couples who are in their 30's and 40's with families and who have accumulated a certain amount of wealth. They started to feel the pinch with the fall of Bear Stearns and the fallout from that event. The final segment is comprised of those with net worths of 10 million dollars or more, usually couples in their 50's and 60's who are for the most part empty-nesters and who also have significant disposable income. They started to feel the pinch directly with the concurrent fall of Lehman Brothers, AIG, and Merrill Lynch. While this group is still spending, they're spending much more carefully than in the past.
4. In a section of the WealthSurvey entitled "Changing View of the Luxury Industry", you reveal some very negative perceptions among those surveyed relating to the price of luxury goods and their impression about the overall quality of luxury goods. Are such perceptions new or had you heard unfavorable comments such as these before?
Yes, we had started hearing comments to that effect before this year's survey. There was a sense that luxury had become a commodity ever since certain luxury brands had gone down the "masstige" route. I think many wealthy consumers have been turned off by this and so now they're saying "enough already".
5. To what do you attribute these perceptions or changes in attitude?
The current economic troubles certainly have something to do with it but some of the trends initiated by luxury brands themselves have contributed to the negative perceptions. As mentioned previously, the decision to grow their business through the "masstige" market has not helped but also, the lack of attention to the overall quality of service has hurt the image and reputations of the luxury industry.
6. Saks 5th Avenue made a very controversial move in early December to slash prices across the board including the price of luxury items. They've been severely criticized by other retailers and by the brands themselves. Did they have any choice?
No, they didn't have much of a choice. They were burning through their cash reserves very quickly and they needed to convert their existing inventory into cash. Once they started slashing prices, other retailers had no choice but to follow. Given the severity of the downturn, it was an unfortunate, yet necessary event.
7. In your opinion, will this price slashing have a lasting impact on wealthy consumers' expectations?
For the time being, yes. Consumers will be expecting above and beyond value for money in the short term before purchase and I think retailers are bracing for this. There has been a temporary, yet serious, devaluation of luxury. Brands will therefore have to re-invent the components of the luxury experience to regain their credibility in the eyes of wealthy consumers.
8. Already, some brands with an existing network of stand-alone stores such as Calvin Klein and Marc Jacobs have said they will withhold key pieces from their collections in the future. Do you think the damage to the Saks brand itself will be permanent?
There has been a short-term negative impact of their brand, no doubt. They will survive, and eventually thrive, but they will have to reinvent themselves. For instance, they may have to redesign their stores, significantly improve their customer service, perhaps turn over some of their floor space to the luxury brands where everything from the "look and feel" to the people working there will be controlled by the brands themselves rather than by Saks. They need to show wealthy consumers that they're still a true luxury brand.
9. Customer service is obviously an important component of the luxury experience. Saks has had to slash its workforce significantly. How does a retailer improve service when they've had to let go a significant number of staff?
Even before the downturn, Saks' service was rated as sub-optimal. During an economic boom, hiring tends to be less discriminating. Many of the staff did not have a luxury culture because they did not have the right previous experience, were not properly trained, or did not have the appropriate compensation structure, were not measured or rated, or a combination of all of these critical drivers of luxury service.
There are two major ways for a retailer to dramatically improve customer service that don't cost a lot of money. The first is to create a culture of service among your brand ambassadors. The way to achieve this is through proper training and the appropriate compensation scheme. You also need customer feedback. And, you need to make the compensation contingent on a measurably positive customer experience.
The second entails reaching out to customers with special offers. It's surprising to see the number of luxury brands who fail to reach out to long term customers. It's especially surprising given that it can be done easily enough with technology either via e-mail, mobile phones, etc. These are missed opportunities to connect with your customer and build up brand loyalty via retention, cross-selling and up-selling, and referrals.
10. The concept of customer service is essentially a North American invention. Given that so many key luxury brands are European, do you think there might be a cultural barrier that makes the service component of the luxury experience difficult for them to grasp and incorporate into their brand experience?
We believe the paradigm is starting to shift. For instance, a number of European brands are starting to listen more closely to wealthy consumers. An increasing number of them are purchasing the Luxury Institute's brand ranking and ratings this year, whereas they weren't before. They're slowly starting to realize that offering your customers excellent service is a very good way to build up brand loyalty. A very good example of this phenomenon is Lexus.
Lexus is, by most standards, a very young brand but they've been able to build a tremendous amount of prestige and brand loyalty very quickly because they offer an exceptional level of customer service. Wealthy consumers expect this from a luxury brand and respond positively when they experience it. In times of economic uncertainty, the overall quality of a customer's experience is an increasingly important component of the luxury experience and can't be neglected.
11. Thank you for taking the time to speak to us.
My pleasure.
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