The IMS Équité Luxury Leadership Summit that I moderated in Hong Kong last week focused on two main areas of the luxury industry: how luxury brands can be successful with China’s young and digitally native consumers, and how those brands can create extreme value in today’s era of uncertainty, technology disruption, increased sustainability expectations, and new markets. CEOs, CMOs, and strategy directors of luxury brands from sectors like luxury fashion, cars, wine, and services participated, and their companies hailed from all over the globe: China, Europe, the U.S., and Australia. This facilitated an incredibly varied and global exchange.
Luxury is one of the most difficult categories to manage, and a lack of expertise and indecisiveness about brand direction are the biggest reasons why so many brands struggle — and ultimately fail — in China’s marketplace. Despite the buzz, most luxury brands are as unprofitable in China as they are elsewhere. The difficulty of managing a luxury brand is widely underestimated, but the findings and strategies from this summit apply to any luxury business trying to break into China’s vast market or any other for that matter:
The trap of neglecting the principles of luxury
The best luxury brands are seen as innovative, inspiring, and influential by their customers. Consumers expect memorable moments, an escape from their daily routines, and most importantly, want to fall in love with a brand. But even some of the most successful luxury brands are not good enough to live up to these needs. Many brands tend to rely too much on the fact that they are well-known and provide exceptional craftsmanship. While those are good characteristics, thinking they’re enough is a fatal trap.
Consumers already expect the highest quality, so it’s not a differentiator today. But, when consumers don’t perceive a brand as innovative, influential, or inspiring, they look for alternatives. Many brands don’t take the importance of managing a “love relationship” with their consumers seriously enough until it’s too late and the brand’s luxury allure is lost. One participant mentioned Louis Vuitton as an example. After he bought one of the brand’s signature weekender bags, he would receive a Louis Vuitton magazine on occasion. But after a year, the magazine was not sent to him anymore. He also never received any follow-up communication after the purchase, and he felt as if he were being punished for not coming back. As a consequence, he “broke up” with the brand and didn’t buy from them again. Even highly successful brands have room to improve.
Underestimating Millennials, Gen Zers, and women
Combined, Millennials and Gen Zers are the most important customer groups for luxury brands worldwide. In China, they now account for over 80 percent of luxury purchases, and women buy more than 75 percent of all luxury goods in China. Despite this, many brands are still focusing on older, male consumers because they can’t successfully connect with younger, female consumers who have different expectations. The ability to have real-time consumer insights from a digital infrastructure and A.I.-supported marketing tools is indispensable to brands, especially with younger, digitally-oriented generations who have less brand loyalty and make more decisions online. One participant admitted that the digital tools his company had in place weren’t able to support them on a day-to-day basis, resulting in too much internal guessing instead of external measurement. That leads to decisions based on gut feeling, which is like a brand playing Russian roulette.
Social currency and luxury brand equity building
Supreme and Off-White are two recent examples of brands that have found success because they represent social currency. They capitalize on a “cool factor” and create a scarcity along with the “acquisition hurdle” of long lines at their stores, which also creates buzz and luxury value. Many luxury brands struggle to create a target group relevancy that would allow them to be seen as must-have brands. A different approach is needed. Instead of changing the marketing first, companies should start by building brand equity before anything else. A rigorous brand audit is needed every two years, with a focus on validating the precision and differentiation of brand positioning. Once this is done, adjustments can be made. It’s the only way a brand can eventually win any kind of social currency.
The importance of brand storytelling
Brand storytelling is extremely important in luxury, where it’s the key driver for a brand’s perceived value. In the end, this is the main weakness for most brands. There’s almost always a correlation between the precision of a brand’s storytelling and its financial results. One cardinal mistake is when a brand tells their story from an internal perspective, such as “we are masters of handmade craftsmanship.” Apart from being too vague, a story like this isn’t relevant unless it translates into a tangible consumer benefit.
Why the customer journey is crucial
Another typical mistake brands make is not creating a branded experience across all customer touchpoints. Many brands create what I call a “category journey,” which means they do exactly what everyone else in their category is doing, so they become impossible to differentiate from other brands. On top of that, one imperfect touchpoint is more than enough to destroy the delicate perception of luxury. Very few brands have customer journey managers, and even fewer have created dedicated brand-equity building strategies for each touchpoint. Focusing on the “important” touchpoints is not enough: They’re allimportant. This is where customer journey audits and optimizations are game-changers in building, turning around, and accelerating brands.
Mass market tactics destroy the aura of luxury
How far can a luxury brand be stretched before they start becoming less luxurious? In my experience, this is an area where a lot of brands gamble their future. One participant shared his experience with one of the most famous luxury skincare brands in the world. The company’s former CEO asked the store staff in China what they would do to grow the brand, and they said to redesign the stores to have more foot traffic. After following this advice, more people did enter the store, but surprisingly, sales plummeted, and the average price of their top-end products permanently decreased by roughly $100 per unit, which led to a catastrophic profitability loss the brand never recovered from. Why? Because the increased store traffic was made up of consumers who were spending less. Then, the company responded by offering “affordable luxury” items. Not only that, but the former high-end customers stopped coming to the stores because there were too many people there and they didn’t feel it was luxurious enough anymore. The brand became too expensive for the remaining customers, so instead of growing the brand through added “affordable” luxury, the brand decreased in revenue and profit, even after reaching a larger audience.
Pricing mistakes: Why many luxury brands are too cheap
When companies in luxury use their competition as a benchmark for pricing, they will always price incorrectly. This is because the price of luxury has to reflect the so-called Added Luxury Value (ALV) that the luxury brand creates. This value can be estimated, but it depends on the brand, not on a product’s features. In fact, some of today’s most expensive luxury cars, which are already priced between $2-10 million, are priced too cheap, with their profit potential yet to be realized. The same goes for the luxury segment of almost any category, including handbags, fashion, accessories, and more. Many luxury brands are priced incorrectly and are leaving tangible profit gains on the table.
Winning in China means winning in the world
China has the youngest, most digital consumers in the world. They are impatient, always connected, curious, experiential, and most importantly, have higher expectations than consumers in other regions. They are what all consumers will look like in the future. Brands that fail to be relevant for Chinese consumers today may fail on a global scale tomorrow.
Why so many Western brands are unsuccessful in China
A typical weakness of almost all Western brands in China is that they don’t have real-time insights at hand that allow them to understand trending topics and shifts in consumer sentiment as they happen. I always hear from CEOs and CMOs that they do social media listening, but when I ask what the three most important brand-related insights are that emerged during the last hour — or even the last day, week, or month — they can’t give me an answer. That’s because doing social media listening alone is useless. Brands must deploy A.I.-supported technologies that allow them to make sense of their data. In short, most companies today operate in China without sufficient or timely understanding of consumers. They fail to identify trends early enough and then make the wrong decisions.
Another common mistake is not emphasizing the brand story for Chinese consumers. In China, the brand always comes first when people buy luxury. Just showing a spectacular handbag or a car without telling the brand’s story does not work. Unfortunately, most of the communication content that brands create in China is irrelevant to consumers there, with brands wasting millions of dollars without any ROI. Additionally, the need to create digitally connected brand communities is often neglected because it’s currently less important in the West. There is too much reliance on classic “analog” advertising like billboards, which — in many cases — have become irrelevant for Millennials and Gen Zers.
To succeed in China, many luxury brands need to change their capabilities by adding more cultural sensitivity, client skills, and luxury training to their brand story in China. Most brands are simply not ready for China. The market is too important and expensive to operate without precision, and mistakes cost much more than the initial investment there. It must be looked at this way: Preparing a brand for China is like preparing your brand for the future of luxury. The sooner it’s done, the better.
Daniel Langer is CEO of the luxury, lifestyle and consumer brand strategy firm Équité. He consults some of the leading luxury brands in the world, is the author of several luxury management books, a regular keynote speaker, and holds management seminars in Europe, the USA, and Asia. Follow @drlanger