Luxury value chain:
how to maintain leadership
in this business?

The luxury market is receiving everyday more attention. Scientific research is also focusing on luxury management: some of the most frequent research questions regard understanding which are the sources of value that justify the “luxury” label and how the luxury value chain should adapt to a continuously changing business environment.

Luxury value chain: how to maintain leadership in this business?

We are living in an era of unprecedented challenges, in which the rise and fall of a luxury brand could occur quite abruptly

Article by Cecilia Maria Castelli and Alessandro Brun on ‘International Journal of Retail & Distribution Management’

The luxury market is receiving everyday more attention, as witnessed by the impressive number of forums, workshops and other events dedicated to it. Scientific research is also focusing on luxury management, where some of the most frequent research questions regard understanding which are the sources of value that justify the “luxury” label and how the luxury value chain should adapt to a continuously changing business environment (characterised by disruptive trends such as, e.g., explosion of digital technologies, more literate consumers, turbulence in both primary and emerging markets, etc.).

To make sure to maintain leadership in this business, top managers of luxury firms should have the following five “hot issues” at the top of their management agenda.

1. Exploit the digital revolution

Arguably, one of the most relevant current trend shaping the twenty-first century competition is the so-called “digital revolution” – that can either be a threat or an opportunity, depending on how it is faced. Indeed, new technologies are challenging the current business models; hence, luxury companies shall strategically plan their digital evolution in a comprehensive way (i.e. considering a number of technological developments which go well beyond setting up and operating an e-commerce platform). Several issues are to take into account, such as mapping the purchasing behaviour of “smart consumers”, figuring out how to use “big data” available in directly operated stores, implementing supply chain (SC) visibility, virtualizing product development and manufacturing, and so on:

As the VP for Product Development of one top leather goods company told us once, upon our prompting him to introduce, in each bag, a plate with a unique identification number, “Our company style is so classic, we are afraid of innovation. I don’t see any advantage in placing such a plate into our bags”.

Well, luxury customers – across all age ranges and markets – are asking for growing transparency, and might be keen to know the “history” of their bag: from the materials used to produce it, to the plant in which it was assembled, […] and will be extremely disappointed by not being able to do so.

2. Manage digital communication

Strictly linked with the previous issue, luxury companies – many of them way too old-fashioned when it comes to communication style – should swiftly change their communication style to reach the newly relevant target group: Gen Y or Millenials. This, of course, without being inconsistent with the brand identity.

The challenge is therefore twofold: from the one hand to learn a new language and to use it effectively; and, at the same time, to manage the virtual social environment where the brand is present to ensure utter coherence in an “omnichannel” perspective:

In the Internet era, whatever message you send out is amplified and broadcast. This could result in a double-edged sword. Make a wrong move, or send out an inconsistent message, and the whole world will immediately know. And if you decided not to communicate through Internet at all, others will do that for your brand.

You can’t stop bloggers, forums, and any virtual communities, from commenting on every single choice your brand is making.

3. Keep investing in your core competences

Each brand has to clearly understand which core competences (either design, innovation, excellent manufacturing, etc.) are the foundation of its success. It is paramount that such strategic know-how be kept as an internal asset: in fact, internalizing core competences is of the key reasons behind the choice of vertical integration characterising the recent strategy of some successful luxury brands, irrespectively of the fashion-sensitiveness of their business:

Know your strengths and keep reinforcing them.

“On average, our skilled leatherworkers have 35-40 years experience within our company.” This is something you just wouldn’t hear. Who will manufacture your bags when – in 5 years time – all of your craftsman will be retired and your core competence vanished?

Savvy companies regard apprentices as a future asset, and nurture them in their leather-craft academy.

4. Maintain local production activities

“Country of origin” is still a critical success factors (CSF) of paramount importance to position a brand in the top of mind of luxury consumers. In case the product or brand was associated with a “made-in-X” idea, it would be mandatory to set manufacturing facilities in the corresponding country (or even region or district). Luxury brands should avoid delocalization in low cost countries, especially when such countries are not associated with excellent manufacturing or heritage for a certain kind of product or craft (this is especially true for first lines, while mixed policies may sometimes work with diffusion lines). Several brands are even “re-shoring” production from Far East to Europe, following the recent turbulence in the exchange rates:

The “offshoring-to-low-cost-countries Eldorado” is now over. An historical brand of absolute luxury shoes realized that its “Made-in-China-handbags-venture” was detrimental to the shoes business also. It is now re-shoring – at what a cost!

5. Be sustainable

Consumers are becoming more and more aware of social and environmental issues. Knowledgeable customers – today no longer limited to mature markets – rather than showing off their status through even loftier levels of expenditures, are now shifting their interest (and money) towards objects and experiences pleasing their intellect. As a consequence, sustainability should be one of the top strategic directions for luxury companies. Indeed, socially and environmentally ethical practices can contribute to higher margins (due to an improved perception of the brand and products) as well as savings in the long term (the third dimension of sustainability, beyond social – “People” – and environment – “Planet” – is, indeed, economic – “Profit”).

Hence, luxury companies should introduce sustainable practices along the whole SC, as well as in the retail stores:

Because luxury company cannot afford not to be sustainable.

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