Selling Luxury to Everyone

Few retailing segments have been as hot in the past several years as luxury goods. Even as middle-priced stores have struggled, luxury goods and luxury brands have, in many cases, outperformed the rest of retail. How?
by Julie Jette

Luxury is the new essential. Consumers know it and retailers are reaping the bounty. At a "Growth Strategies in the Luxury Goods Industry" panel on April 3 at the HBS Retail and Luxury Goods Conference, moderator Nancy F. Koehn summed it up well. Koehn, the James E. Robison Professor of Business Administration at HBS, called luxury goods "a changing space, a space with extraordinary zip and excitement…Things are kicking along vigorously."

"Simultaneous with that, there's all kinds of change," Koehn said, noting "the extraordinary redefining of luxury by established middle-market and even lower-market players." For example, she said, "eight years ago, Starbucks was a luxury game on the east coast. . . . Now, Starbucks is daily standard operating procedure—a mass business."

"The tectonic plates that define luxury are shifting," she said.

Panelist Rory Tahari, creative director and brand designer for Elie Tahari, Ltd.—and wife of designer Elie Tahari—said she saw a clear trend toward higher expectations from consumers in the fashion industry. "We're experiencing ourselves a tremendous amount of growth right now," she said. "The consumer really wants highly designed garments at an affordable price."

Tyler Morse, president of Bliss, an upscale spa and beauty company purchased by Starwood Resorts and Hotels in 2004, said that even in a recession consumers will splurge on luxury items, particularly those that give them a little taste of luxury at a reasonable price.

"It's an affordable luxury," he said of his company's beauty products. "Do you have thirty-two dollars in your pocket for a tube of moisturizer? Every day of the week."

But how can luxury goods manufacturers and retailers keep the segment growing? Tahari said she and her husband have considered the idea of buying one of their retailers in an effort to get more information about how their products are selling, improve their margins, and better control how their brand appears.

You go into a mall and everybody is getting into the cosmetic business.
— Tyler Morse, Bliss

"We'll know exactly what brands are performing well, exactly what sizes are selling," she said.

Instant Feedback

Morse said controlling a retail channel is a powerful growth strategy for his company. Bliss performs 55,000 facials a year. Those services provide the company with a paying focus group from which it can gather feedback on its products.

"Our customers are paying us $200 [a facial]; you better believe they give us feedback," he said. While the company has a far smaller research staff than big cosmetic houses—Morse noted that Estée Lauder has 400 chemists—selling products to customers who come in for services help it compete.

Daniel Langer, executive director of marketing for hair products maker Bumble and Bumble, said that while many luxury goods companies have diversified their brands, his takes the opposite approach. It wants to be known specifically for its hair products, which are sold through 1,800 salons.

Koehn encouraged panelists to share their fondest strategic wishes—as well as their worst fears.

Tahari said that her company's biggest challenge is coping with a much shorter product lifespan in the fashion industry. "What used to be a six-month turnaround in fashion is now six weeks," she said.

Morse said his company is competing with an ever-more crowded market in cosmetics, a high-margin business that has enticed many retailers: Think Gap Body. "You go into a mall and everybody is getting into the cosmetic business," he said.

But most of the panelists said the opportunities of the past several years have far exceeded the challenges.

Tahari said her company's sales have grown by more than a third in the past three years. She credits its pricing for part of that growth. "It's at that 'not-too-expensive, but it's not cheap' really effective price point," she said.

Langer recalled an old industry saw to the effect that "in a recession, a really good business to be in is lingerie and lipsticks."

Joe J. Johnson, national manager of Maybach sales operations for Mercedes-Benz USA, LLC, has perhaps faced a more significant challenge than the rest of the panel over the last several years: launching an extremely high-end automobile during a tough economy. Starting at $315,000, a Maybach isn't exactly an affordable luxury. Mercedes-Benz launched the super-premium auto brand after opting out of the bidding for Rolls Royce and Bentley in the 1990s. The company estimated there are 200,000 individuals in the United States with a net worth of $10 million or above—and Mercedes believed it could sell Maybachs to 400 or 500 of them.

"The market is smaller than we had anticipated," Johnson said.

So far, the brand is struggling to gain market share, and Mercedes-Benz has some high costs to recoup. Johnson estimated it cost about $1 billion to develop a car model. And it cost the seventy Maybach dealers in the United States (out of 340 Mercedes-Benz dealers) about $300,000 to $400,000 to create new showrooms for the cars. Last year, the company sold about 500 cars worldwide, half of them in the United States.

"I do think it's possible to do 300 or 400 cars [a year in the United States]. It's just some years out," Johnson said.

About the Author

Julie Jette has been a business reporter for eight years.