EMERGING MARKETS: HIGH FASHION FIGHTS RECESSION

Course Name: Global business Strategies

Week No: 1

Assignment Name: High Fashion Fights Recession

Student Name: HOA, VO THANH

Date: 05.Mar.2017
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SUMMARY OF CASE:
What would be the likely challenges in emerging markets for luxury goods firms?
This is a good question. I would say that the challenges that are most likely to
occur (based on both my experiences and the research that has been done), are
and would likely be finding enough consumers to purchase those high end
item(s), dealing with the possible changing business and or political and or tax
rates in those said nations, and probably the ability to answer the following
pertinent question; is it financially feasible and probable in terms of profitability to
not only open stores or find stores, or franchises to offer the high end luxury
goods in the ...
An experienced expert discusses what would be the likely challenges in
emerging markets for luxury goods firms, how much bargaining power
consumers owned during the Great Recession, and he also explains "strategy as
theory" and the challenges of changing this as well as implementing new
business plans.
1. Using the five forces framework, how would you characterize the

competition in the luxury goods industry?

To illustrate the overview of the industry, Porters’ Five Forces is used in our

analysis.

Five Forces Frame analyses

Threats of New Entrants: Low

 EMERGING MARKETS: HIGH FASHION FIGHTS RECESSION

The engine that drives the sale of luxury goods is its brand. People go for brands

that have reputable statuses. The presence of strong brands creates brand

loyalty of its consumers. As such, barriers to entry in this industry are generally

high due to the difficulty in penetrating into the highly saturated luxury goods

market. A newly entered brand that wants to compete with established brands

such as Hermes or Coach would find them in a disadvantaged position as they

are not able to compete with them in terms of demand. In addition, new brands

would likely suffer from poor profit margins. Furthermore, given the large

economies of scale that incumbent firms have, they are able to drive out newly

entrants who lack the competency. Established luxury brands are able to

minimize risk through diversification of their brand portfolio. Moreover,

established brands that are listed in the stock exchange market (example Coach

being listed in the New York Stock Exchange) tend to have more financing

options.

Bargaining Power of Buyers: Low

Luxury goods tend to have a rather inelastic demand. Prices of luxury goods tend

to be high even during an economic downturn. Despite having a bleak European

backdrop of the past few years, the luxury goods industry has continued to thrive

lead to a perception of a fall in quality of the product and a corresponding fall in

demand. This is in stark contrast to normal goods, in which a decrease in price

will lead to an increase in demand. (Bagwell, Bernheim, 1996) Rather, an

increase in the price of the luxury goods will attract more customers who equate
 EMERGING MARKETS: HIGH FASHION FIGHTS RECESSION

quality with price. Therefore, it is this unique quality of luxury goods that enable

them to thrive even under unfavorable economic conditions. However, with that

being said, it actually depends on the brand itself. High-end luxury goods such as

Hermes and Louis Vuitton tend to have no discounts or promotions for their

products while lower end luxury products such as Michael Kors and Coach have

regular promotions and discounts for their products. So it ultimately depends on

the brand. Lowering the price significantly may actually signal a drop in quality or

old designs which may deter people from purchasing it.

Threats of Substitutes: Low

There are three main factors for the threats of substitutes: the price of substitutes,

quality of substitutes and switching costs to consumers. It can be argued that

there are virtually no substitutes for luxury goods as each brand is unique and

cannot be replaced with another brand. Hence, even though non-luxury products

offer the same functionality as most luxury products, due to the significant

differences in brand perceptions, non-luxury products offer at a most a weak form

of substitute to the luxury brands. Another point of concern for the luxury goods

market is the increase in worldwide shipping of counterfeit goods from China.

“Grade A” counterfeit products from China are arguably almost identical to the

real product and often only experts are able to tell the difference between a

genuine and fake luxury product. As such, consumers who are not able to afford

the genuine product tend to go for these counterfeit goods that are similar in

quality but much cheaper in price. However, we have assessed the impact of the
 EMERGING MARKETS: HIGH FASHION FIGHTS RECESSION

proliferation of counterfeit products on the luxury goods market to be low. This is

due to counterfeit products not evoking the same kind of elite status symbol that

genuine luxury goods provide. Rather, users of counterfeit luxury products are

always susceptible to the possible embarrassment if the product used was

identified to a fake one. In fact, most consumers would choose to go for a lower

end luxury product as compared to a counterfeit high-end luxury product.

Bargaining power of suppliers: Moderate

Many brands have acquired suppliers to protect their competitive advantage

against other brands as well as to insulate themselves against future rising

supply costs. As such, relationship with the suppliers is very important. Switching

to a new supplier will also cause an increased risk of switching to a lower quality

supplier. The number of suppliers available is also low for these luxury brands as

many of their products require highly skilled craftsman. However, given that most

luxury companies are huge conglomerates, they still tend to hold significant

bargaining power over their suppliers.

Competitive rivalry within the industry: Moderate

Many of the brands do take competitive brands into consideration when setting

prices. Different brands set different prices based on the quality and prestige

each is perceived to be. This is due to the brand loyalty that each brand has.

However, post financial crisis, the luxury goods market has carved out a new

segment—the affordable luxuries such as Coach and Michael Kors. Unlike top

tier brands like Hermes, these brands are considered to be at the lower spectrum
 EMERGING MARKETS: HIGH FASHION FIGHTS RECESSION

of the luxury brand industry, competing more on price rather than exclusivity. As

such, with the rise in middle income population who desire to own their own

luxury brand products, the increase in sales for these lower end brands increases

enough to provide competition for the higher end brands. (Lisa Wang, 2013)

2. How much bargaining power did consumers as buyers have during

the Great Recession?

The fall consumption during the period of the Great Recession 2007-2009, had

an adverse impact on the luxury goods industry and meant that firms had to

place more emphasis into appealing to the remaining market of discerning

consumers. Consumers were less obliged to try and ‘keep up with the Jones’, as

they had to reduce their consumption on non-essential goods and services and

the ‘Jones’ were less compelled to show-off.

Therefore because of the fall in numbers, the consumers had more of an impact

on the luxury firm’s bottom line and the firm thus had to somehow motivate

consumers to spend, this is in relation to taste and preference however, since

consumers were too small to significantly influence price and price is an

important factor in the perceived luxury of a good. Therefore the bargaining

power of consumers was medium, since goods not only had to be priced right but

also offer some value and be of high quality for consumers to purchase the

product.

3. Why was discounting looked down upon by the industry peers, all of

which were differentiated or focus competitors?

 EMERGING MARKETS: HIGH FASHION FIGHTS RECESSION

Informal code of conduct

Maintain image and demand

Discounted - low end fashion industry

Recession - cut prices quietly; no publicity LVMH stood rock, increased revenue

in recession

4. What would be the likely challenges in emerging markets for luxury

goods firms?

There are many challenges for luxury goods firms entering the emerging markets.

I can summarize these challenges as below:

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Reference
1. https://newyorkessays.com/essay-high-fashion-fights-recession/

2. https://brainmass.com/business/international-business-strategy/strategies-business-

during-great-recession-607848

3. http://knowledge.essec.edu/en/strategy/the-logic-of-luxury-in-emerging-markets.html

4. https://www.linkedin.com/pulse/emerging-markets-luxury-market-growth-countries-

mariana-silva-buck