The Road To Luxury. Blanckaert Christian

in profits. Diageo, which was more exposed in Ireland and Greece at the time they were saddled by the debt crisis, was the worst hit of all, indicating a strong negative impact on sales.

      Luxury cosmetic and fragrance brands were hit by the recession, too. Estée Lauder and L'Oréal slid into the red, and undertook significant cost-cutting operations. The recession hit this segment in part because women tend to stock beauty products and perfumes. During times of recession, they usually fall back on the stock they have built over the years. However, some companies managed to stay profitable, including Sephora, Revlon, and Sally Beauty.

      The crisis was affecting other brands, especially in the field of arts de la table. In 2009, Lalique, Daum, Baccarat, Cristalleries de Saint Louis, and many others suffered a great deal. On the other hand, 2009 was a very interesting period that tested the strengths and weaknesses of the sector. The conglomerates showed poor figures compared to the bright numbers posted year after year for the previous 10 years. Sales of brands such as Burberry, Armani, and Cartier – including the whole Richemont Group – suffered. Hermès, Louis Vuitton, and Prada were probably the most successful survivors; in fact they were winners in terms of announcing positive figures of sales.

      The crisis was for real as far as the luxury world was concerned. The response of the luxury sector revealed to the analysts, researchers, investors, and other stakeholders that luxury was sensitive to the economic situation of the global world, just like every other sector. In fact, no one could pretend that luxury was invincible, and rich investors realized that the niche aspect of luxury was fading away. This was in fact the consequence of the evolution of the luxury world. Not only big and financially strong conglomerates with millions of customers faced the crisis – it was also faced by small family-owned players in the luxury business. They were all affected by the crisis and the stock market.

      Strategic Response to Crisis

      The strategic response to the crisis was not easy. It showed that the evolution of the luxury sector was still wide open. Transformations were taking place. Luxury could not be defined as it had been before. Brands had to reposition themselves during the crisis, adopting starkly opposing strategies.

      The response to the 2009 crisis was varied. A change in consumer behavior was observed during the recession, wherein consumers spent a lot more time comparing prices of various fashion brands. Thus, the conversion of a potential customer into an actual customer required more time and resources. Before, a consumer bought 10 products, but now he or she buys just one, and only after careful deliberation.

      The broad strategies adopted by players during and postrecession involved two fundamental orientations: internal and external. Internal strategies, as the name suggests, were internal to the company and were those that were not visible to the consumers, whereas external strategies were those that were undertaken to gain the consumer's attention and buy-in. The internal strategies included cost-cutting, greater focus on the product quality, financial restructuring, and downsizing. Bernard Arnault described it thus: “a natural tendency of companies during a crisis such as the one we are in now is to cut costs, drop prices, and stop expanding, because it has the most immediate impact on numbers.”6

      The external strategies included expansion in terms of both product offering and geography, repositioning, upscaling of the brand to tap the richer among the super-rich, or downscaling to recruit a larger customer group.

      In response to the crisis, as a knee-jerk reaction, some luxury brands tried hiring freezes, reducing the number and the size of the collections, rationalizing media spending, and reducing headcounts. It was felt that dropping prices and cutting costs were the last resorts. The press referred to it as cost containment. For example, Dolce & Gabbana slashed its prices by 10–20 percent. At the same time the company began a search for alternative low-cost stitching techniques and reduced spending on advertising (returning to low rates of 20 years before). Stella McCartney closed its boutique in Moscow just 18 months after it was opened. Richemont closed 62 stores, mainly in the United States, while Burberry absorbed heavy charges on its Spanish stores. In November 2009, Burberry unveiled a cost-cutting program, which resulted in the closure of the Thomas Burberry collection. It hoped to generate infrastructure efficiencies by shutting down six stores and reducing headcount by more than 1,000 people. All this cost Burberry $6.7 million in the period, with the hope the company would generate savings of $77.8 million. In response to the slowdown of Asia, their key market, Burberry announced in September 2012 that it would freeze hiring, lower travel expenditures, cut marketing spending, and defer IT projects. Estée Lauder followed a four-pronged strategy with layoffs of about 2,000 employees, freezes in pay, discontinuations of non-profit-making brands, and cuts in discretionary capital expenditures of 25 percent.

      Contrary to the cost containment approach, Bernard Arnault stated, “What we have learned in the many crises we have been through is that this (cutting costs) is a mistake, especially when it comes to luxury… If you don't put your products on sale, consumers feel they are buying something that retains its value… Even during tough times we can continue to invest and during the crises I went through in the past 20 years, we always gained in market share.”7

      Different companies tried a different set of strategies to reposition their brands. Christian Dior exited its logo and accessory product business as it pursued an upscaling drive, in the hopes that the super-rich would not be affected by the crisis. Coach, which happened to be in the heart of the subprime crisis in the United States, felt that “normal” buying behavior among consumers had experienced a shift and consumer spending levels would never return to what they had been precrisis. Thus, an internal change in the company itself was required. Coach explored lower price options for the consumer, providing them with a larger range of accessible products. Driven by a similar thought process, Swatch and Ralph Lauren also launched products at lower price points. To reduce costs, some brands took their manufacturing operations to low-cost regions of the world. Prada and Burberry shifted their manufacturing base to China for certain products. Louis Vuitton considered building a shoe factory in India.

      Armani suffered a 41.4 percent drop in its net profits in 2008–2009. Dior experienced almost flat sales through the recession, and Burberry, which opened stores in India, the Middle East, Macau, and China, posted a loss of $8.8 million in 2009 compared to a profit of $232.5 million in 2008. Some companies, on the other hand scaled down their operations. For instance, Dolce & Gabbana scaled back their operations in Japan. As an LVMH executive summarized, “Before the crisis, we were putting a lot of energy into beautiful stores, but now we care a bit less about expanding our network and even more about design and price.”8

      However, some companies decided not to compromise on such factors. One of the major winners from the crisis, Bottega Veneta, had a very different strategy: The company decided to not change its positioning at all. Bottega Veneta continued to manufacture its products in Italy and invested in its artisans to ensure that they continued to produce traditional, quality output. The idea was to ensure that their product was exclusive enough to merit the premium price they intended to demand. It held steady and stuck to what it was best at – finely crafted products with clean, classic lines. This ensured that the brand was two steps ahead of its panic-stricken competitors. IWC also practiced this philosophy. It utilized handmade craftsmanship, limited distribution, and impeccable service. Hermès manufactured its leather goods and silk products in France and Italy and did not resort to production in China. Not only did some companies try to deliver unmatched service quality, but they also standardized this service quality across continents. This ensured that the consumer walking into an outlet in New Delhi would not get a different experience from one walking into an outlet on Rodeo Drive or the Champs-Élysées. Ritz-Carlton and HFS were brands that worked on the parameter of service excellence.

      Continuing with varied strategic response, some brands saw the crisis as an opportunity and expanded through (1) widening or spreading to new geographies, and/or (2) launching new products. Notable among those companies that expanded geographically (or widened its base) were Prada, Hermès, Bottega Veneta, and Christian Dior Couture.

      Prada, in 2008–2009, undertook its most aggressive investment plan. It hoped to get out

6

Vanessa Friedman, 2009.

7

Vanessa Friedman, 2009.

8

The Economist, “LVMH in the Recession: The Substance of Style,” 2009.