A report by The Economist Intelligence Unit THE FUTURE OF LUXURY1 © The Economist Intelligence Unit Limited 2017 THE FUTURE OF LUXURY FOREWORD We are fortunate to be able to call upon voices within the industry. In this article, we are pleased to introduce Dr. Langer, an authority on premium, luxury and beauty brands and regular speaker on strategic branding. Perhaps counter-intuitive at first glance, strategies for luxury brands can particularly benefit fast-moving consumer goods and premium brands, too and even value brands. This article looks at the key challenges and what luxury companies can do to overcome these. In fact, many of Dr. Langers most successful innovations and brands in the value and premium beauty sector were developed with insights from luxury in mind. Luxury products can be seen as the most desired (and therefore highest valued and highest priced) items within a segment. The understanding of what makes these items exceptionally valuable can help brands with a more accessible price positioning to increase their relevance, become more desired and more unique. This enables companies to capitalize on the higher brand value with premiumization strategies to increase competitiveness, revenue and profitability. We hope you enjoy the read. Stefanie Siraghi Director, EIU Consumer practiceThe future of luxury © The Economist Intelligence Unit Limited 2017 2 The time for complacency is over Managing luxury is more difficult than ever. The luxury market has become truly global. The majority of sales for traditional European luxury brands is coming from Asian consumers now. New brands are entering the market, building on local ways of living and celebrity trends. What people wear on Abbot Kinney Boulevard in Venice, California, The Bund in Shanghai, Tverskaya Street in Moscow, Shibuya Crossing in Tokyo or on the London Underground has more influence on the expression of luxury than ever. About a decade ago, most luxury managers I spoke with were not only ignoring digital channels, they fundamentally believed that luxury and e-commerce would never (!) go together. They pointed out that the experience of going into a luxury-brand store was critical and couldnt be replaced. How different reality is today. Many newer luxury brands dont even have store fronts any more but focus instead on selling through the internet. Augmented reality will boost this trend even more. Luxury consumers around the world (Average annual growth in the number of AB consumers(a) (2017-2022) Source: The Economist Intelligence Unit. (a) Socioeconomic levels are defined using a variant of the AMAI methodology for Mexico, applied to all countries. AB consumers are defined as the upper level including multi-milllionaires and those living in luxury. 30 5 Year CAGR 2017-2022, %The future of luxury © The Economist Intelligence Unit Limited 2017 3 Consumers have become more sophisticated and knowledgeable and now expect more. Ethical shopping is no longer a buzzword that is high only on the agenda of Millennialsmany others are looking for authenticity when they spend enormous amounts of money on luxury brands. Lifestyles change. Wellness has become the new luxury for many, with more and more people becoming concerned about their health and wellbeing. And this is not only a new segment. Wellness influences almost anything: changed behaviours, with more rigorous exercise schedules for many; changed expectations regarding the comfort and design of car interiors; different views on what a hotel or spa experience should be; and increased demand for healthier options on restaurant menus, to name just a few. In this already dramatically changing context for luxury brands there is further disruption from several trends that will play a major role for luxury managers over the next few years. If left unaddressed, these trends will not only challenge the success of incumbent brands but endanger their very survival. Many previously iconic luxury brands are already suffering and are in steep decline because they did not change early enough and not radically enough. The time for complacency is over. Luxury managers need to leave their comfort zone and make their brands future-ready. This includes strict brand-equity thinking by defining and sharpening brand positioning. It entails optimising the customer journey, and it requires something that has been lost for many luxury brands: offering a truly authentic experience. An experience that is so memorable and unique that consumers pay the enormous premiums that luxury brands can charge. Personal luxury goods (Market value in billion dollars) Source: Statista; EIU forecasts 0 50 100 150 200 250 300 350 400 450 22 21 19 17 15 13 11 09 07 05 03 01 2000 99 97 1995 Online sales Offline sales 0.0 2.0 4.0 6.0 8.0 10.0 Russia Hong Kong Middle East South Korea Germany United Kingdom France Italy China Japan United States 31.3 8.0 7.1 6.9 6.8 6.2 4.7 4.3 3.2 2.7 1.3 22% 21% 30% 23% 4% Beauty Hard Luxury Other Apparel Accessories 100%The future of luxury © The Economist Intelligence Unit Limited 2017 4 Importance of sustainability and ethical brands to Millennials when purchasing high-end fashion or luxury items worldwide in 2017 Source: Statista 0.0 10.0 20.0 30.0 40.0 50.0 0.0 10.0 20.0 30.0 40.0 50.0 Never Rarely Sometimes Always 30.7 47.2 17.0 5.1The future of luxury © The Economist Intelligence Unit Limited 2017 5 Luxury is difficult Managing luxury is not only more difficult than ever, it is actually one of the most difficult managerial tasks. This is deeply embedded in the nature of luxury. Langer (2008) and Langer to go to a grocery shop and buy like a local; to ask the host where she takes a yoga class and try that studio “as a friend of a member”; or to dine in the restaurants the host would go to. And there is a different level of privacy between renting a luxury house and staying at a hotel. Luxury brands have an extraordinary growth potential if they disrupt their own business model and come up with services that create unexpected experiences for their guests. The opportunities are almost limitless. And if the incumbents dont reinvent their business models, outsiders will do so instead.The future of luxury © The Economist Intelligence Unit Limited 2017 8 Share of engagement and attention Luxury is different for everybody. But ultimately it is about a unique and memorable experience. A life experience. An emotion. The realisation of a dream. In a quantitative luxury study I could show that luxury signals to the owner of a luxury itemand also to others around him or hersignificantly enhanced opportunities of life: the ability to break out of the daily routine; opening yourself up; gaining access to beautiful things, to art, to culture. The perception of adventure. Creating a memory. Even enhanced attractiveness and self-esteem. To tap into this, luxury companies need to shift their focus from volume thinking to thinking in terms of share of engagement and attention. And the great news for many luxury brands is that they are already today in the business of engagement of attention. But only few brands get everything right. Customer journey thinking is crucial. And although many things that create tremendous value dont even cost much, they can make a dramatic difference and allow for higher-priced services. But it requires innovative thinking, agility and processes in implementing engagement and attention throughout the organisation. In speaking with luxury managers, I get regular feedback that disruption causes major headaches across all luxury categories. While trends threaten established companies, they also allow for opportunities to disrupt and grow for those luxury brands that embrace and master the challenge.