Will luxury goods ever become too popular?

Just imagine everybody walking on the street holding an LV bag or Gucci or any other brands. Does it influence what you want or not want to carry?

I was thinking about this when I was writing my previous blog about luxury brand houses offshoring their manufacturing plants to China. It was supposed to be one of my concerns until I came across a very interesting article in Business Week about Coach (Is Coach becoming too popular?) which proves that this is a legitimate concern worth discussing.

Coach’s sales has been rising continuously for 3 consecutive quarters, beating Wall Street analyst’s estimates in the fiscal second quarter. This fact is certainly something for investors to be ecstatic about, but many of the Wall Street investors are worrying that Coach might not be able to sustain its earning growth. Upbeat about these nice mounting figures, the CEO of Coach even boosted the number of stores that Coach will open this year from 30 to 40. (Watch interview with Coach CEO Lew Frankfort on CNBC).

What analysts and investors are worried about is that sales and profits might sore for a moment, but it will come a time when Coach becomes too ubiquitous that it loses its specialness, something which happened to GAP in the 1970s when similar healthy market conditions for expansion was observed. GAP enjoyed a 122% increase in sales between 1998 and 1999, but in just two years, it started to decline because the GAP look was too ubiquitous. Similar cases also happened to Calvin Klein and Tommy Hilfiger when they try to capture more sales by targeting the discount market.

Some people are puzzled about the gravity that pervasively capturing the market can cause, but as I mentioned before, luxury brand industry is different from a lot of consumer products; luxury goods signify the socioeconomic status of people who buy them. Contrary to network goods on the other side of the spectrum, where the value increases with increasing number of people, it follows a different strategy than network goods.

There are certain dangers in pervasively targeting all market segments for luxury brands. Like what Coach is doing, in order to attract the younger group and having increasing sales, Coach has released a line of leather products that are lesser than $100. When luxury companies have such actions, their luxury products are not luxury anymore, removing the positive income elasticity that luxury goods should have.

What is important for luxury goods is their brand image. Tiffany, for instance, marked up its price for some of its jewellery for fear of change in its brand image.

LV also provides a very good example where it is successfully penetrating the huge market in China and all over the world, but at the same time preserving its high-end image. What LV does differently is that it focuses on what they do best – behaving in the way luxury brands should behave. It focuses on serving the top of the pyramid with its main products such as handbags, wallets, leather luggage, marking up prices yearly so as to retain value for their products. (Although this is unappealing from a customer's perspective, it successfully creates the asipiration and desire in buying their products).

It is understandable that many luxury brand companies are flocking to newly arising markets to capture market shares, however, I believe they should strategize and do it with care. Luxury brand companies should not forget their core values and ideas. If not, having huge sales for a moment can come at the cost of their brand image. We’ll just have to observe if Coach will continue to have sustainable profits if it carries on with its present strategy.

"Ubiquity can be the death of a brand, you need to be very careful when you expand." says Robert Passikoff, the CEO of Brand Keys, a New York brand consultancy.

What does offshoring to China entail for the luxury goods industry?

What is the first thing that you would do if you see a piece of clothing or accessory while shopping at a high-end branded store? My first reaction is always to marvel at it for 10 sec and then immediately pick it up, not to try it on though, but to see if I could afford it and also where it is made from.

A few years ago, I would be surprised to see high-end luxury goods being made in Asia. But now, it's a completely different story. For most of the things that I can afford as a student in those stores, majority of them are 'Made in China' or 'Made in Vietnam.' Even those slightly more expensive items are made in Asia.

It's not difficult to understand this phenomenon of companies moving their manufacturing plants to Asian countries, especially China. Companies in almost every industry have moved over to China because of the potential large market and also it's low cost advantage over other countries. The luxury brands currently operating in China are largely of European origin and span across various retail sectors such as fashion apparel and accessories, footwear, perfume and cosmetics, jewellery, automotive, and liquor. Louis Vuitton, Bally,Gucci and Ferragamo were among the first wave of high-end retailers to open outlets in China more than 10 years ago. And now, LV, Prada, Coach, Kenneth Cole, Armani Exchange and many more has manufacturing plants set up in China. Burberry is planning to do so too, albeit many opposing voices (I'm sure some of you might have heard about this, even Prince Charles had something to say - Read).

Being someone who is conscious about where those high-end goods are produced, I have some general concerns:

By using low-cost Chinese labor, luxury goods companies could lose the whiff of glamour that surrounds their brands and justifies their relatively high prices.

What sets luxury brands apart is that they command a premium over their counterparts because they have a unique set of characteristics including premium quality, craftsmanship, recognisability, exclusivity and reputation. Luxury brands not only convey a standard of excellence, but act as social signals to indicate access to the rare, exclusive and desirable.

In the past, Europe's luxury brands have all created the image that their products are superior because of their European craftsmanship and materials. Relocation to low cost manufacturing countries such as China could be risky since these luxury brands will be losing some of their allure, which contributes to their high prices and desirability.

Quoted from chief executive of Brioni Roman Style Italian fashion house, Umberto Angelonithe: " When you start changing the ‘made in’ label, you create an expectation among consumers of lower prices, because everybody perceives costs in such countries to be 90 per cent lower."

Moreover, some retailers believe that Chinese factories lack the craftsmanship and experience to make luxury goods. Chinese labor would have to learn skills that were passed down from generations to generations in order to produce the same level of quality European products.

Many of these high-end luxury brands used to source for quality craftsmanship, emphasizing the importance to their brand. By moving manufacturing to a low cost country, it contradicts with their original company objectives and missions.

Me and luxury

Hi there. Welcome to the Grand opening of Charis’ blog on the luxury goods industry.

I am currently a last semester business student at the University of Southern California. I am majoring in both accounting and business administration, emphasizing in Information Operations Management, and I am also pursuing a minor in Psychology. I was born in Taiwan but more than half of my life I was living in Malaysia and Singapore because of my Dad's business. We have a manufacturing plant in Malaysia for magic pens and markers. I grew up literally with the company, maybe that's why I inherited the 'businessman-woman' gene and so I hope one day I would be able to set up my own manufacturing business.

For my blog, I will be blogging on anything that is related to the high-end luxury goods (clothing, handbags, accessories etc.) industry. For instance, writing about issues such as why companies producing high-end luxury products are moving their manufacturing plants to low costs countries such as China, the pros and cons of this movement, and its potential impact on customers.

To tell you the truth, I wasn’t a big fan of branded goods before I came to USC. Names such as Louis Vuitton, Burberry, and Tiffany sounded foreign to me. After three and a half years of influence from rich kids all over the world, I had transformed from a couldn’t-care-less to a brand-conscious-enthusiast. I still remember the first time during freshman year that I woke up at 4am to queue for some luxury handbags with my friends during Thanksgiving… Since then, it has become a yearly routine and some shallow obsession has started to develop for luxury goods. That is the reason why I am interested in writing about this particular industry. (Who knows, maybe I will be setting up a high-end luxury goods manufacturing plant someday)

Being a poor college student right now, branded clothing and accessories are more than I could afford. For now, I can only enjoy the simple joy of writing about them, looking at them on magazines and in stores and hoping some good friends will give them to me *hint intended*.

If you are interested in the luxury goods industry or want to learn more like I do, do return for more! I will have a discussion of high-end luxury goods offshoring their manufacturing to Asia next.