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Challenges for Future Growth in the Luxury Sector

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The luxury sector has seen decades of prosperity with tremendous growth, undergoing a process of expansion that has slowed down in recent times. Brands have a variety of strategies for responding to this scenario. Two such strategies—digital transformation and the interest of millennials in this segment of products—can be great allies in this ever-changing environment.

The luxury market has been in constant growth over the past several years. In the last three decades, this boom has gone hand in hand with international development and the opening of new markets, such as Japan and China. To quantify this trend, suffice it to say that in just 20 years it has tripled in size. However, since 2014 this sector has suffered from a clear stagnation. This situation has led certain companies to undertake a restructuring process that has affected both their staff and physical stores. An example we have seen is the overexposure experienced by the well-known brand Prada, which has had a clear impact on its income statement.

Strategically, there is some confusion when it comes to discerning between the problem and its effects. To clear up this doubt, it is important to look at whether growth is the company’s objective or if growth is actually a consequence of achieving its objective. The theory of strategy is clear in this regard: Growth will always be the consequence of the strategy and never a strategy by itself. This means that the decision-making process must be based on addressing the factors that prevent expansion and not so much on growth itself.

One of the first measures that companies can adopt is to improve the online experience. With digitization, most firms were reluctant to face this reality because they felt that in their industry direct interaction with the client was essential in order to appreciate and understand the product.

Digital Transformation

One of the tools that luxury companies have at their fingertips to improve their position is digital transformation. It should not be perceived as a threat, but rather an ally that will support the business model. Just as the perception of exclusive has changed from what it was 10, 15 or 30 years ago, the forms of production and sales have followed suit. One of the first measures that companies can adopt is to improve the online experience. With digitization, most firms were reluctant to face this reality because they felt that in their industry direct interaction with the client was essential in order to appreciate and understand the product. What they failed to realize was that, when someone gets in front of a tablet or smartphone, this difference vanishes.

An online luxury store must provide and maintain an excellent online shopping experience. On that note, there are two fundamental aspects that will help remedy this situation. The first is to shed the mistaken mindset that online presence is equivalent to e-commerce. Every luxury company aims to sell products, but this is just one of the reasons that justify an online presence. The second is to change the classic sales paradigm. That is, the experience of an online store must resemble, complement or extend the experience of the physical store. Both must be at the same level. Thus, it is advisable for service, assistance and advice to be integrated.

Beyond determining how to improve purchasing processes in the Internet era, companies must define a complete digital strategy. This will depend on the type of product and company. As such, the environment opens the door to creativity and the use of a multitude of different tactics to design this digital commerce experience. What must always be respected are the principles that define what an electronic luxury organization means. The strategic approach to this development should involve connecting the digital transformation with the company strategy and not focusing solely on increasing sales.

The new generations, such as millennials, are part of social evolution. This means that their values are different when it comes to consuming luxury and understanding what this concept means to them.

Millennials

The new generations, such as millennials, are part of social evolution and pose new challenges. Their values are different when it comes to consuming luxury. However, the concept of luxury is not so different for them, as pointed out in the study Luxury Surrenders to the Internet, published by the Premium and Prestige Business Observatory at IE.

The emergence of the Apple Watch is a perfect example to illustrate this new complexity. This digital watch set high expectations and caused some misgivings in the mechanical watch industry. Here is the reasoning behind the launch: If new generations of buyers seek and want different products, that will lead to new competitors and, ultimately, the fall of some traditional competitors. The lesson to be learned is that, to understand the type and scope of the threat, we must consider at least three aspects: the type of threat, the resources and capacities needed to face it and the coherence of the strategy.

To identify if the alleged threat is complementary or substitutive, we must look at the type of benefit it provides. By maintaining the comparison between digital and analog clocks, we can see that both have expanded their offerings and have not done away with each other. They are allies to expand the luxury business. Obviously, there will be changes in the sector, but a product that expands the existing offerings will bring new customers to the market and consumers will have greater decision-making capacity.

One common mistake is to associate luxury with classicism or tradition. If these companies should be characterized by something, it should be about being at the forefront of creativity.

Another important aspect for companies is to consider which resources and capacities exist and which are desirable or necessary. It is indispensable to consider those that are essential for creating a competitive advantage and, in the case of not owning or controlling them, knowing how this can affect corporate development. This element is a great indicator of how much one can compete with guarantees against a particular threat. For example, in the case of luxury watches, certain companies have collaborated with technological giants to get what they were lacking and, consequently, market a new product that is in line with the trends. This shows that, undoubtedly, both options require different resources, although entry into the smartwatch segment poses a certain risk. Because, although it is a trending product, the companies producing them control the essential resources.

Lastly, we must consider the coherence of the strategy. Luxury is a representation of what society determines this concept is. Companies cannot make the mistake of believing that they are the ones who define it. Each company must have its own strategic intention that defines its values and gives them meaning in the market. Firms that have an established direction set their objectives in a specific way, independently of wanting to generate profits or satisfy customers. One common mistake is to associate luxury with classicism or tradition. If these companies should be characterized by something, it should be about being at the forefront of creativity.

 

David Millán, Associate Professor of Strategic Management at IE Business School.

© IE Insights.

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