Luxury Goods Industry Analysis 2013

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1. Presented by: Stephanie So, Evan Lui, Vanessa Yau, Richard Kan & Trevor Li 2. The Luxury Goods Industry 2013 What is luxury? Luxury goods have more than the necessary and ordinary characteristics compared to other products of their category 3. The Luxury Goods Industry 2013 characteristics of luxury products The Concept of Luxury Brands, 2012 4. INDUSTRY BACKGROUND 5. The Luxury Goods Industry 2013 Global Market size Bain & Company, 2012 6. The Luxury Goods Industry 2013 growth by geographic markets Pwc, 2012 7. The Luxury Goods Industry 2013 Growth by product category Pwc, 2012 8. The Luxury Goods Industry 2013 recent trends Globalization over 40% of sales is from luxury tourism Bain & Company, 2012 9. The Luxury Goods Industry 2013 recent trends Globalization plenty of untapped potential in emerging markets Bain & Company, 2011 10. The Luxury Goods Industry 2013 recent trends Consolidation individual brands are bought up by large luxury groups Bain & Company, 2011 11. The Luxury Goods Industry 2013 recent trends Consolidation large companies experience much higher margins Brand recognition (esp. emerging markets) Economies of scale (eg. advertising) Optimal brand portfolio management Pwc, 2012 12. The Luxury Goods Industry 2013 recent trends Diversication apparel brands branch out to other luxury product categories, eg. jewelry, cosmetics, perfume, even restaurants McKinsey, 2012 13. INDUSTRY COMPETITIVE ANALYSIS 14. The Luxury Goods Industry 2013 The five forces model Porters Five Forces ModelThe Threat of New EntrantsRivalry among Existing CompetitorsSuppliers Bargaining PowerBuyers Bargaining PowerThe Threat of Substitutes 15. The Luxury Goods Industry 2013 Threat of new entrants Brand LoyaltyScale EconomiesCapital RequirementExclusive Access to Suppliers & DistributionPotential Retaliation from Existing Companies 16. The Luxury Goods Industry 2013 brand loyalty Brand image and CRM programs build high brand loyalty 17. The Luxury Goods Industry 2013 brand loyalty Decreasing brand loyalty as a result of different needs in emerging markets Emerging TraditionalEmerging Extravagance Status Obvious brand logo Traditional Craftsmanship Exclusivity Innovation Service CRM Heritage easily switch to other brands of similar status Pwc, 2012 18. The Luxury Goods Industry 2013 Scale economies Consolidation of luxury brands achieve high economies of scale e.g. LVMH, PPR (Gucci), Prada Group, Richemont Minimize risk through diversication in the company brand portfolio More nancing options e.g. IPO Operating synergies e.g. advertising 19. The Luxury Goods Industry 2013 capital requirement A very high break-even point In the luxury sector, even the smaller brands have to pretend they are powerful and rich, and by doing so they end up with a very high break-even. ..For example, every brand must be present everywhere in the world. If the Japanese tourist cannot nd his Givenchy or Aquascutum store when he visits Milan or New York, he may well conclude that these brands are weak and he might decide to stop buying them in Japan. (Abstract from Luxury Brand Management: A world of Privilege) 20. The Luxury Goods Industry 2013 capital requirement High marketing & management costs Distribution Fees: High rent to develop monobrand boutiques in prestigious shopping areas e.g. South Koreas Apgujeong; HKs Tsim Sha Tsui Canton Road To develop global presence, 400 stores are needed to cover the world! High salaries for craftsmen High investment for promotional activities e.g. Chanels elaborate runway shows during Paris Fashion Week; Louis Vuittons microlm 21. The Luxury Goods Industry 2013 Exclusive Access to Suppliers & Distribution Many brands have acquired suppliers to protect competitive advantage and insulate against future rising supply costs E.g. LVMH acquired two watch dial manufacturers Lman Cadran and ArteCad SA, French artisan shoemaker Delos Bottier & Cie and haute couture manufacturer Arnys. 22. The Luxury Goods Industry 2013 Exclusive Access to Suppliers & Distribution More and more distribution access points are available to brands Contemporary areas like The Bund in Shanghai brings a multi- sensory experience to luxury Value Partners, 2007 23. The Luxury Goods Industry 2013 Potential retaliation from the existing companies Small luxury brands do not have high barriers of distribution Pressure from powerful groups to prevent them from having access to multi-brand retailers 24. The Luxury Goods Industry 2013 The five forces model Porters Five Forces ModelThe Threat of New EntrantsRivalry among Existing CompetitorsSuppliers Bargaining PowerBuyers Bargaining PowerThe Threat of SubstitutesHigh 25. The Luxury Goods Industry 2013 threat of substitutes Price of Substitutes Quality of Substitutes Switching Costs to Customers 26. The Luxury Goods Industry 2013 price of substitutes Rising popularity of middle price (high street) brands Consumers tend to trade down during economic crises Worldwide shipping of counterfeit goods from China 27. The Luxury Goods Industry 2013 quality of substitutes Increased Internet accessibility of top luxury brand designs allow fast fashion brands to respond and copy trends within weeks after fashion shows e.g. Zara, Steve Madden 28. The Luxury Goods Industry 2013 switching cost to customers No monetary switching costs Loss of prestige if switch to high street or fast fashion brands 29. The Luxury Goods Industry 2013 The five forces model Porters Five Forces ModelThe Threat of New EntrantsRivalry among Existing CompetitorsSuppliers Bargaining PowerBuyers Bargaining PowerThe Threat of SubstitutesHigh Moderate 30. The Luxury Goods Industry 2013 buyers bargaining power Number of Buyers relative to Suppliers Level of Dependence on a Buyer Switching Costs Possibility of Buyers Vertical Integration 31. The Luxury Goods Industry 2013 number of buyers Decreasing buyer concentration Increasing number of buyers relative to suppliers Example: Chinas emerging middle- class buyers Concept of affordable luxuries spreading in second-tier cities & satellite towns Increasing number of wealthy households Of the 1.6 million wealthy households, about 50 percent were not rich four years ago 32. The Luxury Goods Industry 2013 number of buyers 33. The Luxury Goods Industry 2013 level of dependence on a buyer Luxury industry depends heavily on top-tier customers Average spending by luxury consumers rose by 30% in 2009 MOST driven by small groups of super- afuent top-tier consumers Top-tier customers eg. celebrities are usually early adopters and can drive consumption But not one single buyer can determine prices 34. The Luxury Goods Industry 2013 switching costs Buyers who develop an emotional attachment to the brand may have emotional switching costs Increasing switching costs with the introduction of customer loyalty programs E.g. LVs VIP clients receive free gifts 35. The Luxury Goods Industry 2013 Possibility of backward integration Extremely low possibility Customers purchase luxury products for direct consumption No business reason for backward integration Size of luxury companies usually way out of a buyers purchasing power 36. The Luxury Goods Industry 2013 The five forces model Porters Five Forces ModelThe Threat of New EntrantsRivalry among Existing CompetitorsSuppliers Bargaining PowerBuyers Bargaining PowerThe Threat of SubstitutesHigh Moderate Low 37. The Luxury Goods Industry 2013 suppliers bargaining power Number of Suppliers relative to Buyers Level of Dependence on a Supplier Effective Substitutes Switching Costs (Switch suppliers) Possibility of Suppliers Vertical Integration 38. The Luxury Goods Industry 2013 number of suppliers Limited high skilled workers Skills shortage retiring craftsmen, not many youngsters willing to learn Couture-level embroiderers in France: ~10,000 in 1920, dropped to ~200 now 39. The Luxury Goods Industry 2013 level of dependence on a supplier Some key components and materials are outsourced e.g. LV outsources its monogrammed leather Chanel ordered a large bunch of leathers from one supplier at one time in case they wouldnt nd a better one 40. The Luxury Goods Industry 2013 effective substitutes Highly specialized atelier darts with a narrow scope of expertise E.g. Feather-maker Maison Lemari, Costume jewellery and button-maker Desrues Very hard to replace 41. The Luxury Goods Industry 2013 switching costs Cannot easily switch to another suppliers Past cooperating experience is important Risk a lower quality of products after switching to new suppliers 42. The Luxury Goods Industry 2013 possibility of forward integration Extremely low possibility Luxury companies, especially large groups, are much more powerful and wealthier than their manufacturers 43. The Luxury Goods Industry 2013 The five forces model Porters Five Forces ModelThe Threat of New EntrantsRivalry among Existing CompetitorsSuppliers Bargaining PowerBuyers Bargaining PowerThe Threat of SubstitutesHigh Moderate ModerateLow 44. The Luxury Goods Industry 2013 rivalry among existing competitors Competitive Structure Demand Condition Exit Barriers 45. The Luxury Goods Industry 2013 market structure Oligopoly A few large luxury groups dominate Large number of small independent brands Big Three LVMH Richemont PPR Gucci 46. The Luxury Goods Industry 2013 Top 10 Industry players *Size of bubble= Revenue Bloomberg, 2012 47. The Luxury Goods Industry 2013 demand condition CountryGrowth in (2011/12)China20%Hong Kong18%The US13%Korea13%Middle East10%The UK9%Japan8%Russia7%Country Personal Luxury Goods Market Growth Demand will grow at a relatively high rate in the near future Bain & Company, 2012 48. The Luxury Goods Industry 2013 exit barriers Emotional Barriers Some brands may not break even but continue operating due to a small number of extremely loyal customers and critical acclaim E.g. Christian Lacroix Never made a prot for the 22 years in operation 49. The Luxury Goods Industry 2013 exit barriers Specialized Assets May be difcult to sell the highly specialized supply chain components E.g. Chanel has 6 atelier darts under it Specialized machines no alternative purpose 50. The Luxury Goods Industry 2013 The five forces model Porters Five Forces ModelThe Threat of New EntrantsRivalry among Existing CompetitorsSuppliers Bargaining PowerBuyers Bargaining PowerThe Threat of SubstitutesHigh Moderate ModerateLow High 51. The Luxury Goods Industry 2013 conclusion Luxury remains one of the best- performing, highest-growth sectors Pwc, 2012 52. The End

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