Next Frontier For Luxury Brands

Next frontier for luxury brands

Gone is the era in which the developed economies of Western Europe and North America ruled the global business landscape with their well developed markets, massive middle class populations, considerable level of disposal income, well established institutional intermediaries and continually growing economies. The current global business landscape is characterized by multidimensional changing paradigms wherein the global core of trade and commerce is shifting toward Asia, especially China and India.

As the erstwhile communist philosophy that ruled China for decades was gradually pushed aside to embrace the capitalist, free market economy, the Chinese market emerged as a global behemoth. It boasted an enormous local market, an ever increasing middle class and gradually growing second and third tier cities, prompting a global rush among major corporations to set up shop.

Today, most young people have spent their entire lives in the free market economy, enjoying hitherto unheard of access to information, money and brands. Additionally, given the presence of an increasing number of returning affluent Chinese people and an increased presence of global luxury brands, the consumption of luxury brands in China is on the rise. Indeed, a recent McKinsey & Company report estimated that by 2020 China will overtake the United States and Japan as the world’s largest luxury market.

Such is the consumption of luxury brands in China that the current $12 billion luxury goods industry is expected to reach $27 billion by 2015. This massive growth will be spearheaded by the middle class. McKinsey forecasts that by 2015 there will be nearly 76 million middle class households earning annual incomes between $15,400 and $30,800, as against a mere 13 million in 2010. Furthermore, 16 percent of the $27 billion luxury industry will be driven by middle class consumers, making them responsible for a massive 61 percent of the entire consumer base.

Given such impressive growth, mostly driven by an expanding middle class with newfound wealth, it is no surprise that luxury brands are making the Chinese market a key component of their global strategies. One key factor contributing to such growth is the integration of many second- and third-tier Chinese cities to the mainstream urban centers such as Beijing and Shanghai. As the fruits of Chinese economic development diffuse beyond the erstwhile urban centers, it is allowing new middle-class consumers to aggressively participate in the booming luxury market.

Such growth is almost always accompanied by many challenges for chief executives and brand managers. They must seek to deploy their resources in order to effectively manage the intense competitive rivalry on the one hand, and expand their corporate scope to include new customers from emerging locations along with core segment of urban customers, on the other. As CEOs and brand managers formulate strategies to capture this growing market, they will be faced with the challenges of balancing the need to protect the overall brand identity and equity of the luxury brand while at the same time being flexible and responsive to adapt to the local market conditions. In this regard, four key steps become very important.

Unique retail strategy: At the very core of the success of luxury brands has been their ability of create a strong sense of exclusivity for its patrons. Luxury brands are priced much higher than non-luxury brands, their associations with top notch designers even further such perception. But most important to maintaining the notion of exclusivity is their brand stores. As creating a unique brand experience that exudes premium and exclusiveness are key to their success, luxury brands have always invested considerably in creating visually appealing and high class retail environments.

Global luxury brands’ retail strategy in China becomes a key corner stone of the China strategy. While the growth of the luxury industry in China has been consistent and strong over the years, an important part of this phenomenon moving ahead will be the role played by cities outside traditional urban centers. For luxury brands to leverage this growth, they will have to change their overall distribution and retail strategy. While the core urban centers have always been targeted with exclusive brand stores, the second and third tiers may not be ready for such brand stores. As such, luxury brands will have to establish strategic alliances with the leading brands of those particular cities such that the brand equity is protected while gaining access to the local market.

Possible brand extensions: The reality of the current global business landscape is that the seamless integration of brands from emerging economies into the global economy is posing a serious competitive threat to the well established global brands of the West. Not only do the emerging economy brands enjoy an advantageous cost structure, but also the huge domestic, largely untapped markets. While luxury brands would ideally want to restrict themselves to a niche customer segment, as with every other industry, the ground realities will push them to devise clever strategies to span the multiple segments via brand extensions.

Although luxury brands thrive on their perceived sense of exclusivity in terms of price points, to fulfill the objective of reaching new middle-class consumers, luxury brands would benefit greatly if they create lower-priced fighter brands. Fighter brands, while belonging to the overall corporate luxury brand portfolio and thereby leveraging its brand equity and resource base, creates a unique brand identity with an underlying value proposition that is attainable to this new segment of customers. Such fighter brands enable luxury brands to test the new emerging segment effectively. As such, investing in fighter brands simultaneously allow the luxury brands to expand to new territories and yet minimize potential risk to the overall brand equity.

Local brand collaborations: One of the central tenets that make luxury brands so appeal to a specific segment of high net worth, niche customers is the notion of exclusivity. The price points, the associations, the experience of buying in exclusive luxury brand retail outlets accompanied by the perceived symbolic value it confers of customers buying such brands ensures that luxury brands are very exclusive as not everyone can afford it. While this idea is central to a luxury brand and is religiously followed by CEOs and brand managers of luxury brands, much like every other global and local brand, luxury brands entering China should readjust and respond to the realities of the Chinese market.

One of the most important strategic alterations that global luxury brands should make in China is to be aggressively proactive in forging collaborations with local brands. While the first phase of the Chinese luxury market was almost exclusively located in the urban centers of Shanghai and Beijing, the emerging centers of Chinese luxury market in the second phase will be beyond these urban centers, and will be much more regional, rural and upcoming centers of commerce and trade. If the global luxury brands seek to capture these emerging segments, it is imperative that they tap into the reach, the knowledge, the distribution, and the political networks of the local players. While at the outset, such collaborations may seem risky for global brands, careful strategizing centered around the strategic brand charter would facilitate them to capture the new segments faster and more effectively.

Chinese pride using Chinese brand ambassadors: As economies grow, it brings about a lot of changes to both the institutions and to the culture of a country. Especially, as customers increasingly gain access and exposure to products and services from brands around the world, it is very likely that they begin to prefer global brands with their unique brand associations, the symbolic value they confer and the aspirational element they espouse. However, as the local competition gears up to exploit the local market conditions, the untapped low customer segments, customers gradually shift their purchase preferences so as to consider local brands along with the erstwhile attractive global brands. Such a shift is evident in many emerging economies such as China, India, Russia and other Eastern European countries.

Especially in China, there is a discernable rise in Chinese customers’ pride in Chinese brands. As local brands such as Lenovo, Li Ning, and Haier among others have made it successful both in China and abroad, Chinese customers are increasingly becoming receptive to patronizing Chinese brands. The sense of Chinese pride is on the rise. Given that, it becomes imperative for global luxury brands entering China to leverage such Chinese pride by collaborating with Chinese celebrities and stars that can act as powerful brand ambassadors.

The key is to strike a balance between aggressively maintaining the global brand message and appeal on the one hand, and the strategic tie-ups with local stars to tap into the Chinese pride on the other.