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What Will Happen To Luxury Companies In A Downturn Economy?
Predictions In The Next Eighteen Months
Mr. Paul Ward
Vice President, Customer Experience, YourMusicOn
G-CEM International Partner (US)
www.Pkward.com
This article is exclusively written for G-CEM.
In the current economic crisis, and with increased consolidation in the luxury industry, high-end luxury companies are facing tough choices. Competition is higher than ever and capital is harder to come by. To eke out profit from falling revenues, luxury companies are frequently tempted by customer management approaches that work just fine in other sectors, without due consideration about what the consequences will be of adopting the practices of businesses whose experience standards are so far below what luxury companies have set. CRM is one example of a technology that tempts, but luxury companies should focus more on customer experience, and view CRM as an essential, but primarily tactical, tool. The key performance indicator for luxury success with the customer is the same: establish an emotional connection that engenders passion for the brand. This is not a typical CRM system performance metric.
I don't want to undervalue CRM for luxury companies, because it can provide the system "glue" that links multiple strategies: partner development, employee training, new media marketing, and customer segmentation. These strategies will be critical to luxury companies navigating the current rough waters in the economy. But the goal is still to create passion.
Let's explore my predictions below for how luxury companies will respond in the next eighteen months.
Consolidation and economic pressure will push luxury companies to CRM and the Internet
When saving money is important, companies look for scale. This is part of the reason so many acquisitions have taken place in the last decade, with countries like France leading the way (they're happy to acquire, less interested in being acquired). But in luxury, there's another reason to consolidate. Luxury brands generally tend to outperform the market, and so the incentive among cash-rich companies is to buy, buy, buy. And given that the luxury market, the masstige market (prestige brands for the masses) in particular, has regularly outpaced the growth of general retail market for years, there's more cash on hand to be spent to buy new companies.
To benefit from merger or acquisition, it's important to consolidate systems and leverage technology. CRM will be increasingly used to track personal data for each customer, with special attention given to how CRM systems can affect the retail experience. Look for well-trained staff and semi-customized CRM systems to help them give an extra measure of service to regular customers.
CRM systems also increasingly improve how companies - luxury companies in particular - leverage the Internet, with personalized web pages, e-commerce (for at least some categories of products), and regular communications. The challenge will be making these web-enabled experiences truly luxurious - or at least consistent with brand values and customer needs. This means that CRM should not be about managing customer data. Only a complete solution that yields the hallmark emotional responses of the luxury experience will succeed. CRM may be a big part of it, but boosting a luxury brand requires more. A comprehensive approach to customer experience management always focuses on the emotional components of a customer interactions, and yields new processes, training guidelines, and even technologies that support branded, memorable, and differentiated experience.
Products and experiences will go hand-in-hand
Scenterprises, founded in 1992 by Sue Phillips, a former executive with Elizabeth Arden and Lancome, creates scents for specific environments like hotels or malls to engage the senses with seasonal or environmental smells. This trend started in Europe over a decade ago, according to Emily Keats, in Global Cosmetic Industry. "Luxury locations invest an immense amount of time and money into innovative architecture and materials' lighting fixtures and proprietary designs, music and customized fabrics," says Keats. Keats reports Phillips' point of view: "Incorporating a scent customized to reflect such sensory delights - creates an identifiable brand message and gives guests a multisensory experience." Hotels have adopted this approach enthusiastically, from the Oberoi Grand in Calcutta and the Conrad in Tokyo, to the Park Hyatt Milan and the Hotel Costes in Paris, according to Keats. Sony Style has pumped custom odors into malls during the holidays to get their attention - and to remind them of their favorite holiday scents.
The trend is not just engaging the senses, it is engaging customer values. Travel will be increasingly values-themed, products will be increasingly green, and luxury companies will be increasingly sustainable.
Ad budgets will drop between 5 percent and 10 percent, with money spent instead on guerilla marketing and retail reconfigurations
Generally ad spend is expected to drop by at least 10 percent globally, and luxury companies will likely follow this trend, allocating their ad spend to guerilla marketing and new retail strategies instead. The reason in part comes from the rise of new media and channels for creating customer engagement, including social networks. It's not just about the big spread in Fortune magazine or Cosmopolitan anymore. It's about connections.
Calvin Klein and Diesel have pioneered online social networks for masstige fashion, but Fortune reports that social networks exist for high society as well. "It's taken a while for wealthy consumers to start using networking sites," says Milton Pedraza, chief executive officer of the Luxury Institute (New York), in a recent Fortune magazine article (Five Social Networking Sites of the Wealthy, May 2008). Participation in some kind of social network has doubled for people making $150,000 annually or more. Some new sites are invitation only, or have a tough set of standards. But the result is the kind of exclusivity that luxury-savvy customers seek.
And the retail experience is where real memories are made. If you get the experience of selling person-to-person right, you'll have a customer for life. As a result, I think we'll see more creativity in store design and an unprecedented level of front-line training. The experience will be hands-on, welcoming and on-brand, delivered by top-notch retail professionals who truly believe in the brand values - including tacit brand values such as beauty, fitness, eco-friendliness, and other attributes.
Spend profiles will vary heavily by region
Credit is tight in the United States, and the country has a new president that will focus on sacrifice. In the meantime, Russia and China are still growing, optimistic, and luxury-centric. We will continue to see an interest in Russia and China in retail luxury and boutique experiences, while in the United States luxury consumers will hold onto their cash, parting with it when the purchase seems to be about quality, core human values, and global sensitivities. The consequence is that luxury companies will invest differently in cash-flush countries than in the United States, and possibly Europe, who will be most affected by this new values-laden perception of luxury goods. Look for capital expenditures in China and Russia, and Internet and social network expenditures in the United States and the EU.
China and Russia will supply new personalities, while Russia and Brazil will supply new products
China and Russia will push their local luxury talent hard, onto the global stage. Setting aside Western concerns with human rights, product quality and international politics, luxury consumers are going to want to experience the unique creations of designers from China and Russia. In contrast, I believe the next couple of years will see an increasing interest in Indian-influenced designs, experiences, and sensibilities. Yoga will continue to be adopted by the wealthy and the aspirational luxury market, and the sensual pleasures of the subcontinent will make their way into clothing, makeup, travel, and media. Brazil, the fourth of the so-called BRIC economic powerhouses, will offer new travel opportunities, beauty products, and even hard goods. The reason is simple: Brazil combines beauty and nature in a simple, single concept - one that big luxury purchasers are ready to adopt, given the global trend in ecological issues. Their feverish pace of mergers and acquisitions will concentrate capital, and their new generation of globally minded managers will be exporting a passion for everything that Brazil stands for.
Materialism is out; meaningful experiences are in
"The Luxury Report 2008, The Ultimate Guide," has a key nugget that goes to the heart of what I believe will dominate luxury during the down economy. Indulgence is out, and meaningful purchasing is in. "Rampant materialism is on the decline," the report says.
One key trend will be moving beyond purely sensual experiences. Luxury companies will be focusing on encounters and concepts that deliver a bigger picture, embedding customers in a drama where the company plays the role of advisor to help the customer justify and rationalize their luxury purchases. Given that Baby Boomers have the most expendable income right now, it may seem surprising to hear that a recent survey showed them as most likely to consider luxury as "wasteful" and "unnecessary." GenY and Gen X respondents, on the other hand, are more likely to aspire to a life of luxury. (See "The Psychology of Travel - What is Luxury?" from the Strategic Travel Action Resource.)
Partners rule the day
Generally companies should look to outsource non-core functions. In a downturn, companies get creative in what they consider "non-core." When I stay at the W Hotel in New York, I take advantage of the Bliss Spa -- a separate company that specializes in luxurious spa services. But I am always brought over to Bliss by W Hotel staff, through a maze of underground corridors, making the hand-off between one brand and another absolutely seamless.
This past summer, Fairmont Hotels and Lexus teamed up to provide Fairmont's best customers with extra personalized service during their stay, including the use of hybrid Lexus vehicles. The trends against "rampant materialism" as exemplified in gas-guzzling vehicles, combines with the trend for brand-aligned networks of partners, to create a mega-trend: providing seamless experiences across service providers that generate a kind of "core meaning beyond the brand." This mega-trend will likely continue for several years as non-competing but similarly respected brands work together to grow their client lists, build brand equity, and devise new ways to compete with companies choosing not to partner with best-in-class companies.
The rise of super-luxury independent concierge services will continue. These services provide customers with anything they want - price is no object, but a failure to deliver is not acceptable. This class of service provider will team with corporations, hotels, travel agencies, high-end fractional ownership real estate companies, airlines, and more. Using scale, CRM and shared human resources, these concierge services will become increasingly more profitable - particularly if they can integrate well with the experience model and brand of their clients.
At the same time, similar services for aspirational luxury consumers who would like to spend even more on high-end goods but cannot yet afford them (a key growth sector in luxury) will begin to appear, with more limited offerings but with the range and depth required to make travel, gift-giving, shopping and leisure time delightful - even surprising.
Conclusion
Luxury is about a world of the imagination where the customer has a hope of getting what they truly deserve. Right now, people are increasingly feeling they deserve a better world.
At the end of the day, luxury companies will have to use CRM, retail experience strategies, new business models and meaning-focused innovation to survive the economic downturn. The key framework they should - and will - turn to? Customer experience management. It has emerged as the management discipline that answers the question that CRM posed: How do we get people to actually desire a relationship with us? If luxury is about anything, it's about desire, and so luxury companies should be - and will be - all about CEM.
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About the author
Paul is a strategist providing customer relationship management (CRM) and customer experience management (CEM) consulting for growth-focused enterprises. Currently VP of Customer Experience at a new high-tech consumer startup. He leads management strategy seminars in Asia, Europe and North America.
Paul is a graduate of the TRIUM Global Executive MBA program (ranked #3 globally by Financial Times) through London School of Economics, NYU-Stern, and Hautes Etudes Commerciales (HEC). His studies took place in Shanghai, Sao Paulo, Paris, New York, and London. As part of TRIUM he also studied with Hong Kong University of Science & Technology and in Sao Paulo with Funda??o Dom Cabral [FDC]. Currently head of the TRIUM alumni steering committee, Paul is organizing events in Shanghai, Florence, San Francisco and Paris. He lectured at Cornell University on Internet trends, social networks and the impact of the Web on economics and globalization. He also lectured at American University (Washington DC) and Robert H. Smith School of Business (University of Maryland, USA) on customer experience management, competitiveness and brand equity. Paul is also the editorial board member of CRM Today.
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