Luxury Isn't What It Used to Be

Cashing in on the $60 billion global luxury goods market has never been tougher—or more rewarding. Competition is keen. And consumer preferences are constantly shifting, causing the concept of luxury itself to change over time. As a result, the market's most recognizable brands have adapted by refreshing their product lines and extending their brand to more affordable items.

Pressure to innovate is intense, says HBS professor Nancy F. Koehn, a business historian and author of Brand New: How Entrepreneurs Earned Consumers' Trust from Wedgwood to Dell. "People today are using consumption even more vigorously to assert who they are socially, psychically, and culturally," remarks Koehn. "As a value proposition, luxury goods are very sensitive to timing and ego."

Adaptation, however, is a risky business. "You can't rely on consumer research to the same extent that you can in other markets," says HBS professor emeritus Walter J. Salmon, a specialist in consumer marketing and retail distribution. He cites "cultural sensitivity"—the ability to know what consumers will want before they know it themselves—as a key attribute for success.

Factor in the demands of consistent quality, innovative design, supply logistics, and the need for superior customer service, and it's easy to understand why David A. Birnbaum (HBS MBA '74), a private jeweler, would sound this cautionary note: "Luxury sounds very intriguing, but you have to be careful. It's not something to enter lightly. You need a real, serious, sustained commitment to shoot for the pinnacle—and to defend and advance your position if you attain it."

Yet luxury's challenge remains an ongoing enticement for Birnbaum and the other alumni interviewed for this article. "Luxury goods are in essence a highly creative field," notes Thuy T. Tranthi (HBS MBA '93), president of Thomas Pink USA, the London-based shirtmaker. "Many of the established brands started out as small, entrepreneurial ventures. It's a field in constant change, which often creates significant opportunity."

The evergreen challenge
Heritage and prestige are the hallmarks of many luxury brands, some of which are hundreds of years old. The enduring quality of a particular luxury good can be part of its appeal, yet consumers—particularly young, fashion-conscious consumers—want a product that looks fresh and unexpected. How does a luxury brand keep its edge and attract new devotees without losing its core following?

"We can still accommodate the traditional customer because our styling is classic," says Matthew McEvoy (HBS MBA '89), strategic planning director at Burberry. Founded in 1856, the creator of the iconic trench coat has outfitted movie stars, outdoor sportsmen, the British military, and the Royal Family. In 1997, Burberry launched a revitalization of the brand that showcased the ongoing appeal of its more timeless products while expanding into fashionable clothing and accessories for men and women. "You can buy the classic trench coat forever. But we've introduced products that have added more modern style so you don't have to be over fifty to appreciate what we're doing," says McEvoy. Today, Queen Elizabeth II wears her Burberry trench coat. But so does supermodel Kate Moss.

At Waterford Crystal, CEO John G. Foley (HBS ISMP '89) has brought on contemporary designers like Versace and Vera Wang to create new china patterns that will maintain the brand's appeal with a new generation of customers. "When they think of crystal and fine china, most young people remember their mother saying, 'Don't you dare touch it,'" remarks Foley. As consumers move away from the formal dining experience to more casual entertaining, Foley says that his company's brand must preserve its aspirational quality while maintaining its relevance in people's daily lives. "Luxury goods are so wrapped up in the psyche and how they make us feel," he explains.

"Any brand has the evergreen challenge," says Vicki P. Haupt (HBS MBA '79), a senior advisor at Steuben Glass in New York who operates her own consultancy. "It's a great art to define what relevancy means for your brand while keeping its heritage alive. It's a matter of catering to existing clients while attracting new customers." At Steuben, Haupt says that there's an ongoing assessment of the appropriate balance between a product's form and function and how that fits with the way people live today.

In the past, she notes, it was de rigueur to set a table with coordinated china, flatware, and glassware. Choosing a pattern was a decision of great importance, since one had to live with that decision for some time. Today, the movement is toward settings that aren't "matchy-match"; Steuben's new lines of glassware work together and meet the needs of a consumer who wants a differentiated, personalized look.

"People live differently today," says Haupt. Asparagus tongs, for example, are a thing of the past. Multiuse items—like Steuben's Magnolia bowl, which doubles as a caviar server when flipped over—are in demand.

An emotional buy
Retail therapy is a relatively new term for a not-so-new phenomenon. Simply put, it's the act of buying things to make us feel better. Part of the experience is finding and purchasing that just-right something, but an equally important component is the thrill of the chase — the sensory experience of entering a store and being surrounded by light, color, texture, and sound.

In February, Louis Vuitton took that premise to a new level, opening a four-story, 22,000-square-foot boutique on Fifth Avenue designed by architect Peter Marino that features details such as flashing LED screens and a staircase made of bronze and chestnut. (An even larger store is scheduled to open in Paris in December.) A boutique's location and "wow" factor may not always translate to hard-and-fast sales, but image is all-important in the world of luxury. A shopper's first impression is of utmost importance.

"I want to make sure that the customer has a wonderful feeling of being transported to a different place when they enter one of our stores," says Thomas Pink's Tranthi. Inspired by the craftsmanship of a late-18th-century London tailor (if you wore one of his hunting coats, you were considered "in the pink"), Thomas Pink combines elements of a British club (mahogany trim and neatly pigeonholed shirts) with a sense of whimsy and fun.

"There is a vast profusion of colors and patterns that makes it like a candy store, so you want to come in and treat yourself," she says.

In addition to the quality of fabric, design, and tailoring, people who buy Thomas Pink are assured of something else, Tranthi says: "I'm going to wear this shirt, and it's going to make me feel great. That's why luxury brands command a premium—it's an emotional buy."

Needless to say, customer service is at the heart of the shopping experience. Tranthi adds that she approves the hire of every sales associate at each of Thomas Pink's ten U.S. stores. "It is the most critical position in the company," she says. "They mediate the interaction between the customer and the product. If that mediation is not an excellent one, the entire brand suffers from it."

"It's about leading a customer through an experience that feels new and comfortable at the same time," says Steuben's Haupt. "In the end, whether they've made a purchase or not, do they feel happily seduced? Is there something satisfying and memorable in the experience that will make them want to return?"

Jennifer M. Koen (HBS MBA '97), director of innovation for Godiva Chocolatier, explains that Godiva is in the process of a top-down refresh of its brand that will involve retooling its product, packaging, advertising campaign, Web site, and boutiques to create a more contemporary, relevant, and luxurious look to entice customers. In the same spirit, the "Godiva Passion Academy" presented a complimentary course at Godiva boutiques in February on the history of chocolate, chocolate tasting and flavor pairings, and chocolate decoration techniques.

"It involves being a leader in connoisseurship and giving our customers a real, value-added experience by learning and connecting with the category," Koen comments.

Visitors to David Birnbaum's simple offices on 57th Street in Manhattan won't mistake them for the more palatial Tiffany's or Harry Winston's, but the low-overhead, low-margin approach works for quite a few of America's financial and business elite. Repeat business and referrals make up the majority of customers for his firm's rare gemstones, with most sales averaging between $50,000 and $150,000. Birnbaum tells of one prospective client in the market for a five- or six-carat diamond who found the prices so reasonable that he returned to consider—and, eventually, purchase—something in the ten-carat range.

Birnbaum notes that this particular client first made contact with the firm five years earlier. In a relationship-intensive business, service, communication, and institutional memory are necessary, but not sufficient, he says. Ultimately, quality and beauty are paramount. "Nuances in fashion and design are always in flux, so you need to listen to the market carefully. To the extent that I can be open and listen like a baby, I win."

Product, product, product
Perceived value—through quality of design, materials, and manufacture—is another key component of the luxury goods equation. "If someone puts a $100 towel in front of you, is it obvious what makes it a $100 towel? The product has to speak for itself," says Haupt, who started as a buyer at Bloomingdale's under former CEO and chairman Marvin S. Traub (HBS MBA '49).

"It's a very competitive market that gets more competitive all the time," says Burberry's McEvoy. "Whether you're offering something new or a perennial classic, what it really comes down to is product. Product is king. Quality is paramount."

"Throwing money around does not create a luxury brand, it just creates a lot of noise," says David Birnbaum. "I think people sometimes forget that you must have a great product behind a luxury brand—not a good product, a great product. If you can sell the experts, you can eventually sell the world," he says. "But it's a fine line—you want to sell to connoisseurs, but not to the curator of the Smithsonian."

These days, it seems that more and more products have been raised to a level of connoisseurship. By turning a commodity into an affordable luxury, Starbucks has demonstrated that there is significant consumer demand for highly differentiated products of a particular origin and formulation, says Godiva's Koen. That preference has spread to other goods, including artisanal chocolate. Introducing Godiva's G Collection, a premium line of chocolates designed by pastry chef Norman Love, was a way to enter that space.

"As consumer knowledge and appreciation for chocolate developed, Godiva wanted a voice that continued to lead the category in a distinct and premium way," she explains. "This is about innovation, about taking chocolate to the next level. The G Collection was created to challenge consumer expectations from Godiva and to reinforce Godiva as a brand that delivers newness and discovery." The fact that it costs around $100 a pound and is only available from November through February no doubt creates an aura of scarcity that only adds to its appeal. In luxury, Koen adds, the balance is always between volume and exclusivity. "Luxury is defined differently by people depending on what they value," she says. "That's what people pay more for—goods that are really special, as well as brands and experiences that mean something in their lives."

"More and more, we're seeing consumption being wrapped up in our personal lives and experiences with others," observes Professor Koehn. "Great brands are all about psychology, not only mass advertising or a neat logo." A Viking range, for example, could represent meaningful time spent preparing meals with family and friends—not just a $10,000 restaurant-quality stove. Creating, marketing, and selling the "killer app" product that captures that meaningful quality in an increasingly crowded, noisy marketplace is luxury's ongoing challenge—and for alumni who enjoy keeping their finger on a culture's pulse, its own reward.

"For any good merchant, the world is a constant source of fascination," says Steuben's Haupt. "It's fascinating to take it all in—politics, the economy, popular culture—and figure out how it translates into what people will be looking for next. That's why I love this business so much."

Reprinted with permission from "Luxe Redux," Harvard Business School Bulletin, vol. 80, no. 2, June 2004.

See the latest issue of the HBS Bulletin.

Julia Hanna is associate editor of the HBS Bulletin.