FT Business of Luxury 2009: summit report - part 1

The nature of the luxury sector today and its future position vis-à-vis provenance and technology were key themes explored by senior executives and designers at this year's annual FT Business of Luxury summit in Monte Carlo.

Luxury has a past, present and also a future, noted Financial Times editor Lionel Barber at the opening of the newspaper's annual Business of Luxury conference in Monte Carlo. "Throughout history, people have always wanted beautiful things, and been willing to pay for them," he said. LVMH chairman and CEO Bernard Arnault agreed: "All societies, civilisations and all human groups have always needed to distinguish rarity, excellence and beauty."

In this defiant mood, senior figures from the world's luxury groups, designers and economists explored the sector's development in the past 15 years, the impact of the global financial crisis on consumer attitudes and also the roles of authenticity and technology.

FT Business of Luxury Sculpture by Elena Gregusova

Luxury sector development

Providing insight into just how much the sector has changed, Angela Ahrendts, CEO of Burberry, noted: "For what looks like an old business, luxury, as we have defined it today, is actually quite new."

In the early 1990s, what was considered luxury for several hundred years was largely a small circle of family-owned or European-dominated houses offering a limited range of artisan products through limited distribution. These products were primarily purchased by a narrow consumer base in Europe and a broader group in Japan.

"If you contrast that with today," said Ahrendts, "the same companies have become global design powerhouses, are marketing-driven, internationally distributed and have diversified product beyond their origins to the point where, in some cases, the largest businesses bear no relation to the category [in which] they were founded." Price points have also broadened considerably while production has moved geographically.

The store networks of just five previously family firms - Bulgari, Gucci, Hermès, Louis Vuitton and Tiffany - tripled between 1993 and 2008, noted Ahrendts. During the same period, capital expenditure increased from €90m to €800m, and spend by this group on marketing and communications rose from around €120m to €800m. Sales increased from €2bn to €12bn over the same period.

The greatest enabler of luxury's modernisation has been the diversification of the consumer base, according to Ahrendts. In order to grow, luxury expanded beyond its historical 'old money' customer, luxury firms targeted a growing class of wealthy professionals and entrepreneurs to grow.

Companies also embraced and pursued the new aspirational customer on a global scale, both at home and while travelling. "So luxury as we know it today is really about 15 years old," said Ahrendts.

The consumer and the crisis

Bernard Arnault, LVMH Delegates in Monte Carlo

According to Bain Consulting, the luxury industry will shrink by 10% this year. LVMH's Arnault acknowledged the severity of the global financial crisis but also pointed out that it will come to an end. "In its wake the consumer will change," he said, adding that: "the lowering of prices in the medium ranges has shown that vulgarised luxury is a very fragile sector - if not a mistake."

The post-crisis consumer will be less able to buy average-quality products for a high price. Instead, the new consumer will admire luxury, but will want to own something exclusive and of good quality. "When the crisis is over, the proliferation of products at lower prices will have strengthened the demand for more sophisticated products," he said.

Sustainability is now key to all industrial activity, said Arnault, and consumer attitudes to the issue are changing. Currently, consumers are challenging rudimentary assumptions to the extent that even the principle of the car is now contested. Some industries will not survive the recession, he predicted.

Authenticity

Panel debate on factory ownership Rupert Sanderson shoes 'Made in Italy'

There was a consensus view among speakers that authenticity will become a defining characteristic of luxury. Linking authenticity to provenance, Hans-Kristian Hoejsgaard, president and CEO of US-based Timex Group, reminded delegates that for a watch to claim it is 'Swiss-made', at least 60% of the work must be undertaken in Switzerland. "There is a tremendous push from a number of Swiss brands to increase that percentage to 80%."

London-based luxury shoe designer Rupert Sanderson also underlined the vital importance of provenance to luxury products arguing that 'Made in Italy' is much more than a romantic concept.

Georges Bohbot, president of Hong Kong-based supplier Silvereed, however, questioned how a label such as Rupert Sanderson would manage to supply given significantly increased demand - highlighting the ultimate dilemma for luxury brands about the trade-off between the limited supply of artisan products and the temptation for brands to grow sales.

Burberry's Ahrendts outlined what she termed the "fundamental truths for luxury", which she split into 'traditional truths', 'modern truths' and 'new truths'. All of these help guide Burberry's thinking.

Heritage, she said, is a traditional truth. Among consumer product businesses, longevity relates more to familiarity than experience and is about time rather than history. In luxury, however, experience and heritage create a narrative which adds to the allure and to the intrinsic value of products. "Of course heritage must be imbued with authentic meaning, quality, performance and craftsmanship, otherwise it's just 'old'," she added.

Technology

Burberry spring/summer 2009 Burberry spring/summer 2010 Burberry's new corporate HQ, New York

Among the new truths faced by luxury brands, Burberry's Ahrendts counted values including ethics and sustainability and what she described as the 'digital tsunami'. "The advances in digital technology and its absorption by consumers is bringing fundamental changes to our ways of operating, including Burberry's relationship with the consumer and the execution of marketing programmes," she said.

Consumers are no longer captive and can readily bypass a brand, or they can be engaged in a digital dialogue that extends well beyond the bounds of traditional media. Interaction through digital media allows the brand to learn more about what its consumer wants and where and when she wants it. "Advertising can move from interruption to a service the consumer actually wants," said Ahrendts.

"In the digital world, unlike the store, the brand is always open and a deeper, more visceral, experience is always available; and unlike traditional media, digital has no shelf-life and the reach is infinite," said Ahrendts.

LVMH's Arnault revealed concern over the growing move towards online shopping. Arguing the case for sales via stores, he noted that luxury is different. "It (luxury) represents European culture all around the world. Without physical shops our brands are condemned to becoming banal.

"Our shops, which are located in the hearts of the biggest cities in the world, are a showcase for our products and that is where they are shown in the appropriate universe - that is where the staff are trained to explain to the clients in all languages about each new collection," he said.

Websites have their place but "it is an illusion that the online experience can be equivalent to a physical store", he continued. "Virtual stores can only provide an imperfect picture of the atmosphere of real stores - they can't deliver explanations, presentations and advice."

Arnault also highlighted his concerns over the parallel trading of luxury brand products by unauthorised internet-based distributors. Along with counterfeit selling online this poses a major threat to the luxury goods industry, especially given the lobbying in the EU by distributors not part of LVMH's selected retailer networks to allow 'unauthorised' distribution.