THE CONCEPT OF LUXURY

Luxury goods are said to have high income elasticity of demand: as people become wealthier,
they will buy more and more of the luxury good. This also means, however, that should there
be a decline in income its demand will drop. Income elasticity of demand is not constant with
respect to income, and may change sign at different levels of income. That is to say, a luxury
good may become a normal good or even an inferior good at different income levels, e.g. a
wealthy person stops buying increasing numbers of luxury cars for his automobile collection
to start collecting airplanes (at such an income level, the luxury car would become an inferior
good).

Certain manufactured products attain the status of "luxury goods" due to their design, quality,
durability or performance that are remarkably superior to the comparable substitutes. Thus,
virtually every category of goods available on the market today includes a subset of similar
products whose "luxury" is marked by better-quality components and materials, solid
construction, stylish appearance, increased durability, better performance, advanced features,
and so on. As such, these luxury goods may retain or improve the basic functionality for
which all items of a given category are originally designed.

There are also goods that are perceived as luxurious by the public simply because they play a
role of status symbols as such goods tend to signify the purchasing power of those who
acquire them. These items, while not necessarily being better (in quality, performance, or
appearance) than their less expensive substitutes, are purchased with the main purpose of
displaying wealth or income of their owners.
MARKET CHARACTERISITICS

Some luxury products have been claimed to be examples of goods, with a positive price
elasticity of demand: for example, making a perfume more expensive can increase its
perceived value as a luxury good to such an extent that sales can go up, rather than down.

Although the technical term luxury good is independent of the goods' quality, they are
generally considered to be goods at the highest end of the market in terms of quality and
price. Classic luxury goods include haute couture clothing, accessories, and luggage. Many
markets have a luxury segment including, for instance, automobile, wine, bottled water, tea,
and chocolate.

Luxuries may be services. The hiring of full-time or live-in domestic servants is a luxury
reflecting disparities of income. Some financial services, especially in some brokerage
houses, can be considered luxury services by default because persons in lower-income
brackets generally do not use them.

LUXURY BRANDS

A luxury brand or prestige brand is a brand for which a majority of its products are luxury
goods. It may also include certain brands whose names are associated with luxury, high price,
or high quality, though few, if any, of their goods are currently considered luxury goods.

Another market characteristic of luxury goods is their very high sensitivity to economic
upturns and downturns, high profit margins as well as prices, and very tightly controlled
brands.

For example, following a nearly crippling attempt to widely license their brand in the 1970s
and 1980s, the Gucci brand is now largely sold in directly-owned stores. The Burberry brand
is generally considered to have diluted its brand image in the UK in the early 2000s by over-
licensing its brand, thus reducing its cachet as a brand whose products were consumed only
by the elite.
LVMH (Louis Vuitton Moet Hennessy) is the largest luxury good producer in the world with
over fifty brands, including Louis Vuitton, the brand with the world's first designer label. The
LVMH group made a profit of €2bn on sales of €12bn in 2003.

MARKET SIZE

The luxury goods market has been on an upward climb for many years. Apart from the
setback caused by the 1997 Asian Financial Crisis, the industry has performed well,
particularly in 2000. In that year, the world luxury goods market – which includes drinks,
fashion, cosmetics, fragrances, watches, jewelry, luggage, handbags – was worth close to
US$170 billion and grew 7.9 percent. The largest sector in this category was luxury drinks,
including premium whisky, Champagne, Cognac. This sector was the only one that suffered a
decline in value (-0.9 percent). The watches and jewelry section showed the strongest
performance, growing in value by 23.3 percent, while the clothing and accessories section
grew 11.6 percent between 1996 and 2000, to US$32.8 billion. North America is the largest
regional market for luxury goods: unlike the modest 2.9 percent growth experienced by the
Western European market, the North American market achieved growth of just under 10
percent. The top ten markets for luxury goods account for 83 percent of the market, and
include the U.S., Japan, China (and Hong Kong), Germany, Italy, France, UK, Brazil, Spain,
and Switzerland.
MARKET TRENDS

The three dominant trends in the global luxury goods market are:

 Globalization

 Consolidation

 Diversification.

Globalization is a result of the increased availability of these goods, additional luxury

brands, and an increase in tourism. Consolidation involves the growth of big companies
and ownership of brands across many segments of luxury products. Primary examples
include LVMH and Gucci, which dominate the market in areas ranging from luxury
drinks to fashion and cosmetics. Leading global consumer companies, such as Procter &
Gamble, are also attracted to the industry, due to the difficulty of making a profit in the
mass consumer goods market.
Characteristics of the luxury industry

1. Luxury means different things to different people

Luxury has no certified origins. But luxury branding is said to have taken birth in the west with
the appearance of high-end brands.

2. Luxury is a product category in itself

This can be best explained by the fact that both an expensive watch and an artwork can be
considered to be luxury items. Therefore, all luxury marketers are not just competing in their
‘technically defined’ product categories (like manufacturers of refrigerators compete amongst
themselves) but for the wallet share of luxury goods in total.

3. The meaning of luxury had changed

Luxury has moved from its ‘old’ meaning of ownership (also known as conspicuous consumption
- Conspicuous consumption is a term used to describe the lavish spending on goods and services
that are acquired mainly for the purpose of displaying income or wealth rather than to satisfy a
real need of the consumer. In the mind of a conspicuous consumer, such display serves as a
means of attaining or maintaining social status. Invidious consumption, a necessary corollary, is
the term applied to consumption of goods and services for the deliberate purpose of inspiring
envy in others) of objects to the ‘new’ meaning of the experience / fulfilment derived from
possessing a certain object. 3
 4. Aura is more important than exclusivity

Exclusivity is something that cannot be ensured to a great extent and neither is it the prime
requirement of a luxury consumer. The consumer bases his decisions on the relevance of the aura
of the brand to his fulfilment or actualization needs.

5. Classification of luxury consumers

SRI Consulting Business Intelligence places consumers in 3 groups according to what luxury
means to them:

􀂙 Luxury is Functional – these consumers tend to buy luxury products for their
superior functionality and quality. Consumers in this segment, the largest of
the three, tend to be older and wealthier and are willing to spend more money
to buy things that will last and have enduring value. They buy a wide array of
luxury goods, from artwork to vacations, and conduct extensive pre-purchase
research, making logical decisions rather than emotional or impulsive.
Messages that highlight product quality and are information-intensive are
powerful with this group.

􀂙 Luxury is Reward – these consumers tend to be younger than the first group
but older than the third. They use luxury goods as a status symbol to say “I’ve
made it!” They are motivated by their desire to be successful and demonstrate
this to others. Luxury brands that have widespread recognition are popular;
however they don’t wish to appear lavish or hedonistic in their appearance.
They want to purchase “smart” luxury that demonstrates importance while not
leaving them open to criticism. Marketing messages that communicate
acceptable exclusivity resonate with this group.

􀂙 Luxury is Indulgence – this group is the smallest of the three and tends to
include younger consumers and slightly more males than the other two groups.
Their purpose for luxury goods is to lavish themselves in self-indulgence. They
are willing to pay a premium for goods that express their individuality and
make others take notice and are not overly concerned with product longevity or
 possible criticism. They enjoy luxury for the way it makes them feel; therefore
have a more emotional approach to purchases. They respond well to messages
that highlight the unique and emotional qualities of a product.

6. Trading up

A mass of wealthy people have emerged the world over, give rise to a large section of consumers
who are now moving to luxury / premium brands, thereby creating greater business opportunity
for luxury marketers.

7. Emergence of luxury brands

Sea of luxury brands have emerged giving a wide choice to consumers, in all segments of luxury
goods.

8. Trading down

Today, fashion brands are giving luxury brands competition because of marketing mix and
branding strategies, which make it acceptable to pair these two brands. This is something that
was not practiced before.
eg. Wearing an Armani shirt with a pair of GAP jeans

9. Factors at play

In luxury marketing there is a subtle interplay between three factors that most strongly influence
the luxury consumer to buy: product brand; dealer or store’s brand or service providers’
reputation; and price/value relationship

10. Customer loyalty is more important that brand awareness

Rather than focus on measuring the brand awareness of a luxury company, measuring customer
loyalty is far more significant a metric regarding the success or failure of corporate strategy to
connect with the luxury consumer.