Luxury Brand Management in Digital and Sustainable Times. Michel Chevalier

from licenses given to outside enterprises. As a rule of thumb, wholesale sales are approximately half of retail sales, export sales are generally 20% of retail sales, and license royalties amount in general to 10% of billings, which can in turn come from retail, wholesale, and export sales. Thus, it just doesn't make sense to compare the two companies in terms of their sales figures.

      To compare the power of two brands, one would have to multiply part of the activity by a coefficient to account for differences in export sales and wholesale sales, for example, so that everything would be computed as a final retail sales amount. But this would still be misleading, because a brand developing essentially through license agreements will be weaker than a brand that controls 100% of its activities at retail. Also, in most cases, the split between retail, wholesale, export, and license royalties isn't given, so assumptions are difficult to make.

      The fact that some brands are developed through licenses, with sometimes, for example in the case of perfumes, royalties from these accounting for only 3–4% of their sales, explains why luxury businesses are sometimes very small, even when the brand has a strong presence worldwide in various stores. However, a brand such as Hermès, which (except for its perfumes) sells almost exclusively in its own stores, can still have annual sales of €6.8 billion in 2019. It may not be as big as Peugeot or Renault, but for a luxury company, it is quite impressive.

The mix of activities makes it difficult to understand exactly what is meant when executives of luxury companies declare sales targets of, say, €100 million in China or Japan. Are they referring to total sales, as will be reported in their consolidated financial statements, or do they mean retail volume, which may earn them only €3–5 million in license royalties? There is a significant difference.

      As a rule, these sorts of statements should be considered carefully, given that, as we have seen, comparing businesses in financial terms can be quite difficult.

       Limited Number of Staff

      The fact that most luxury-goods companies are small or medium-sized enterprises has an obvious consequence: they also have a limited number of staff. In China, for example, the most successful luxury brands have staff numbers of only 100 to 1,000, most of them working in stores. The “small enterprise” element is also amplified by the fact that luxury brands must have a global presence. It is probably safe to say that there are more marketing executives in companies such as Procter & Gamble or Nestlé than in the total luxury-goods sector. Several elements contribute to this situation.

      First, some companies are not just small; they can be very small. They may operate with just a small design studio that monitors trends and designs products, and may subcontract all the other activities to licensees and distributors. So, the next-most important area of activity after the studio is the legal department, or even an outside lawyer, which prepares and follows up contracts with outside partners. Some fashion companies have global headcounts that might not exceed 15 to 30 people. For example, the Nina Ricci brand has a design studio and a limited number of directly operated stores, while all its manufacturing and distribution are subcontracted.

      This tendency to subcontract production activities is the second very particular aspect of the luxury field. Chanel doesn't have its own factories manufacturing all its ready-to-wear items or leather goods. Often, luxury-goods companies have just one or two factories, making prototypes and some product lines. The rest of the manufacturing is carefully controlled but is done by subcontractors. For example, the various components of most luxury-brand watches are generally produced by different companies before the final item is assembled in a fully owned workshop in Switzerland.

An automotive business is all about the factory, machinery, and equipment, but luxury brands are about design and communicating a message. Where are the products made? Who manufactures them? How many consumers know that companies in the LVMH Group, Bally, or Prada have some of their goods or, most probably, product components manufactured in China? What challenges does this pose at the production level? It seems that these questions are never raised.

      Third, aside from the creative activity, the most important part of the luxury industry process is the sale. At Lancôme, probably 80% of the company's worldwide employees stand behind a counter. At Gucci, a very important part of the process happens in the stores. To make a career at Prada or Salvatore Ferragamo, it makes sense to start out working in a store—because this is where contact is made with the consumer. Very few of a luxury brand's employees will be based at headquarters, as all the investment goes into the stores. Ferragamo's group headquarters, Palazzo Feroni in Florence, also serves as the worldwide flagship store and a museum, an important tool for communicating with consumers.

      So, the average luxury-goods company is small. Its sales figures include elements that are difficult to assess and to compare. A lot of activity at the level of manufacturing and distribution is subcontracted. And staff numbers are very limited.

Financial Characteristics

In studying the different luxury companies, and as we will confirm later in this book, it quickly becomes noticeable that a significant number of them are losing money. In any other industrial sector, a firm losing money is rapidly eliminated, merges with its competitors, or goes bankrupt. In the luxury-goods industry, there are brands that have been losing money for 5 or even 10 years and that survive as part of a luxury group or as a diversification within another industrial company. Bic, the writing-instruments group, owned the Guy Laroche company for a very long time and probably lost money for more than 10 years in a row before it took steps to sell out. Charles Jourdan also lost money for many years when it belonged to its previous owners (the proprietors of a large Swiss cement company). Christian Lacroix apparently never generated profits while it was in the LVMH Group and before it was sold and then ended up in bankruptcy.

      Why would intelligent and reasonable executives continue to accept losing money for so long? There are probably two reasons for this: the first entails the value of the brand. Despite losing money for many years, Guy Laroche and Carven remain very attractive to consumers, and there is a tremendous brand awareness. The second reason is that successful brands are so successful and so profitable that they can compensate for many years of losses. In 1994, the research group Eurostaf conducted a study of luxury ready-to-wear companies in France. This study found that Chanel, taken alone, was more profitable than the rest of the sector combined. Of the 14 companies investigated, 10 were losing money. The fact that Chanel was so profitable could lead any other brand to think that it too had the potential to develop and generate similar returns for shareholders. Furthermore, luxury brands are a very productive path that can lead to becoming a lifestyle brand, which, in turn, can lead to enormous growth capacity through product extension. We will look more closely at this phenomenon in Chapter 6.

      In this respect, the luxury business is a kind of jackpot business; not because it is unpredictable and things come only by chance, of course, but because those that are profitable become extremely profitable.

      This incredible spread between unprofitable and extremely profitable companies seems to be the result of two peculiarities. First, the luxury business is a very high break-even business. Second, cash needs are quite limited.

       A Very High Break-Even

      In an average sector, break-even is a function of manufacturing investments and of fixed costs. 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 a Japanese tourist cannot find his Givenchy or Aquascutum store when he or she visits Milan or New York, he or she may well conclude that these brands are weak and decide to stop buying them in Japan.

At the outset, a brand can be in only one place, like the Café Greco in Rome. But as soon as it starts to become international, consumers expect to find it everywhere. Each store, wherever it is in the world, has fixed costs—rental,