Challenges of Marketing Luxury Brand - Case Study Example

Starbucks Order No.334477 November ‘09 Starbucks Executive Summary Luxury brands are premium products, have craftsmanship, a style or design that is unique and can be easily recognized. Luxury brands are exclusive and hence are produced in limited quantities. The luxury market for the last twenty years or so has been growing rapidly .Luxury brands were once considered as the prerogative of a small group of privileged people, namely the super rich. The concept has now changed and luxury brands today are being bought by more and more consumers. For many years the luxury brands market enjoyed an exclusive position and had a comparatively stable market environment. However, today the luxury industry has seen some dramatic changes in changed market conditions. Increase in global competition has changed supply and demand patterns for the market according to Roux and Floch (1996) whereas Arghavan and Zaichkowsky( 2000) feel that it is counterfeited luxury goods that has changed the market conditions. Some feel that economic hardships have also changed market conditions. The changed market conditions have raised new challenges for marketing strategists of luxury brands. One thing is clear that no brand can claim that it is recession-proof even though one can find many instances where luxury brands have done well during recession. For instance, Rolls-Royce reported an increase in its in sales in 2008 and Hermes, a designer bag maker is also faring well. Luxury brands have to discover new and different ways in order to stay ahead. Luxury goods marketing men have to become more creative and cost conscious in order to make a success of the brands. Patrick Chalhoub, Joint CEO, Chalhoub Group, feels that in times of recession companies must have the ability to adapt and compete in the changed circumstances. According to him, "Times of recession bring an emphasis on change for both product and brand. Some of them may not have the capacity to adapt, compete or reinvest, while others will thrive in these circumstances”. Starbucks can be taken as an example on how things can go wrong in changed conditions. Starbucks Corporation that was founded in 1971 has its headquarters in Seattle, Washington. This chain of coffee houses saw tremendous growth and success and by 2007 had more than 15000 stores around the world. But suddenly in 2007 its performance slipped and its share prices began to decline. A combination of reasons, recession and overexpansion among them, was the cause of this decline. It had to bring back Howard Schultz to revive the company. This paper discusses the challenges of luxury brands marketing and how the economic downturn has affected them. Taking Starbucks as an example the paper further discusses the present status of the company and what steps it took to overcome the setbacks in 2007. Introduction Luxury brands that originated in France have a long history behind them. Luxury goods such as Louis Vuitton have been around for a long time. In fact this brand in 2004 celebrated completed 150 years. (LVMH 2005). The word Luxury is derived from the Latin word luxus. Bourne (1957) has defined luxury goods as products that are exclusive and not generally owned or used by all kinds of people. Dubois, Laurent and Czellar (2001) while defining the features of luxury brands have attributed six features 1) high price 2) excellent quality, 3) aesthetics 4) uniqueness and non availability 5) heritage and 6) superfluousness. According to Arghavan and Zaichkowsky (2000), luxury goods are chiefly branded goods that people purchase to satisfy their psychological needs such as esteem. They also felt that luxury brands were hardly bought to satisfy functional needs. This only played a secondary role while purchasing. Vigneron and Johnson (1999) on the other hand believed that while purchasing luxury brand the main motivations were sociability and the need for self-expression. In the 80’s, luxury goods which were once accessible to only a few people, i.e. the upper class became available to the public. According to Roux and Floch (1996), there was a tremendous increase in demand for luxury goods and in the 90’s the luxury market became a significant part of the economy. For example, Louis Vuitton between 2002 and 2004 increased its net income by nearly 80 per cent. (LVMH 2005) The clientele included extended the affluent class as well as the middle class (Roux and Floch 1996). This new consumer base was selective, bought occasionally while carefully evaluating the brand’s value (Roux and Floch 1996). This new development in the luxury brands market meant the marketing had to face a lot of challenges to market these brands and necessitated a review of the existing marketing strategies to market to the newly identified consumer segment. Today luxury brands are facing increasingly stiffer competition from new entrants in the market and the slump in the economy has posed additional challenges. Luxury brands have to reinvent themselves to the totally new generation of potential customers. Challenges of Marketing Luxury Brand The highly competitive and the constantly changing market of luxury brands pose several challenges. There are problems of brand erosion, brand identity, counterfeit goods, etc. The concept of luxury keeps changing. A luxury brand may suddenly turn into a mass product destroying its identity. For instance, in the cosmetics industry a luxury product may be a premium product because it has innovated and has a special and unique extract as one of its ingredients. This, when copied by the makers of cheaper cosmetics results in the loss of brand identity. Counterfeiting is another rapidly growing problem that has posed a constant threat to the luxury market. Designer clothing, designer handbags and other premium products have all been copied and sold at lower prices. Marketing of luxury goods requires a different kind of expertise as the kind of customers who buy luxury brands belong to a different class. These customers seek style and glamour in the brands they buy and want to stand out in a crowd. They buy a Vuitton bag or a diamond encrusted Mont Blanc pen or a custom tailored Ermenegildo Zegna’s suit that costs a few thousand dollars without batting an eyelid. The challenge of marketing luxury brands lies in creating a demand for a product that one does not really need. The challenge is not to expand the reach but to make it exclusive and to present it as a lifestyle concept. In the case of luxury brands profitability is there only when there is discipline in the manufacturing process. There needs to be a tremendous emphasis on quality and productivity. Again managing a luxury brand requires discipline and precision. If your approach is conservative the brand goes unnoticed. If the brand is too visible then there is the risk of devaluing or diluting the brand. According to Lane and Jacobson(1997), Gucci and Lacoste by making their brands widely and easily available caused damage to their brands and brought down the status of their products that normally comes when availability of products is limited. The positioning should be just right. For instance Tiffany & Co has adopted an “affordable luxury” positioning when targeting a broader audience. Again pricing a luxury brand can be challenging. If priced low the product may lose its exclusivity. Hence luxury brands such as fragrances, liquor, and cosmetics have always had a luxury pricing strategy and followed the strategy of limited availability in order to maintain exclusivity. Another factor which can prove to be challenging is the motivation to buy factor. The motivation to buy luxury goods today is quite different from that of the ‘80s and ‘90s. Then purchases were motivated by two factors: mainly status and appearance. But today people lay more emphasis on what appeals to the senses and what gives pleasure. It is more about pleasing oneself. This has put pressure on luxury brands. Luxury brands now more than ever have to reinvent themselves. Again with globalisation the market for luxury has expanded. Marketing men face differences in culture, cultural needs and different ways of doing business. In such a situation the luxury companies that are able to cater to these different markets most efficiently will be the ones that will succeed. In times of recession consumers who still have money to spare will look for additional features. Factors like environmental issues, authenticity of products, craftsmanship, superior technology, durability and customer service have gained importance. Performance of luxury brands in times of economic hardships Luxury brands according to many industry sources have by and large managed to fare better than mass market brands in times of economic hardships. But a new study from brand consultancy Interbrand says that no industry is safe. According to this study no industry can remain insulated and brands in the luxury sector too must continue to build brand value. The group chief executive of Interbrand, Jez Frampton believes that the success of the luxury market in expanding in the recent prosperous times has made this segment more vulnerable. He also feels that there still exists a section of luxury brands that are able to generate long-term value and minimize risk. According to Jean-Baptiste Danet, European chief executive of Interbrand, the social consequences of this economic downturn may bring about a permanent change in the affluent consumers of the luxury market. However David Thompson of Phoenix Marketing International does not believe a paradigm shift has taken place in affluent consumer behaviour because of the economic downturn. According to him this one, unlike the Great Depression, was too short and the quick recovery, even though partially, has not been able to bring about change in consumer behaviour. Overall most investors of the mainstream have more or less successfully faced the storm. Many others believe that recession has gripped luxury companies just as it has companies in other sectors. In the luxury market the brand rules the business whereas in other businesses the business controls the brand. Luxury brands plan for the long-term and unlike other business do not believe in short-term ventures to increase profits. For instance a high-end Rolex is a family heirloom and the financial as well as the emotional value increases as it is handed down through generations. And as such recession does not affect such high value brands. Some luxury brands are conducting business as usual in these times of economic hardship. Cartier is still advertising its Chronograph watch that costs $9,950 while Channel is hawking a $2,150 "Essential" lambskin pouch. Having said this it is clear that consumers have not stopped spending on luxuries completely. In fact consumers who have spare cash are seeing the recession as an appropriate time to spend on luxury goods. According to Rory Teeling, DCH’s planning director, only luxury items like cars, perfumes and clothing that belong to the affordable luxury market will be really affected by recession. He believes that consumers will not stop spending altogether. According to him consumers might scale down their expenses and go in for a luxury Caribbean break instead of a luxury weekend in the UK. It is evident that consumers who are accustomed to luxuries will not give up all their luxuries. Hence luxury products that are positioned properly have an opportunity to survive. The challenges Starbucks faced in 2007 when it faced a decline in its sales and stock prices in 2007 and the steps it took to face these challenges of an economic downturn and certain strategies that went wrong in changed conditions are worth discussing. Starbucks’ is an example of how certain decisions can erode a brand. Starbucks Starbucks Corporation which was established in 1985 is based in Seattle, Washington. It purchases, roasts, and sells whole bean coffees all over the world. The products it offers are brewed coffees, cold and espresso beverages, a variety of food items and also equipment and accessories related to coffee. It also sells through its retail stores premium teas and compact discs, In addition Starbucks through other channels sells and licenses its trademark. Among its popular brand are Seattle’s Best Coffee, Tazo teas, Torrefazione Italia coffee and Starbucks Hear Music compact discs. By 2007 Starbucks came to be widely recognized and became one of the most admired brands. It achieved this by following a strategy of robust growth and product mix that included non coffee drinks, music, food, movies and books. New stores were added in various locations with amazing speed. The number of Starbucks stores worldwide tripled in five years time. The number of stores which was about five thousand or so in 2002 increased to more than 15000 in 2007. (The New York Times) Starbucks in 2008 In 2007 Starbucks found that the economic environment had forced most consumers to cut down their expenses on luxury goods. According to Ann Marsh (2009), the Starbucks fancy cup of coffee that had once been a symbol of “daily indulgence” has on the onset of recession become the first item to be cut by consumers. Starbucks also felt the effect of increase in gas prices, rising costs, competition and overexpansion. Some real estate brokers and some analysts have a different story to tell. According to them Starbucks in its determination to meet growth targets compromised on its standards for selection of locations for new stores. In this connection Brad Stone (2008) said that the biggest mistake Starbucks made was in the area of location. The economy exposed all the mistakes in its strategies. Share prices began to decline and in early part of January of 2008 Starbucks shares were priced at $18 as compared to $35 of the previous year. Starbucks in 2008 affected by the slowing down of consumer spending, higher labour costs, increase in the price of milk and the fact that it might have saturated the market in the U.S. decided to close about hundred underperforming outlets and slow down the opening of new stores in the U.S. In a telephonic interview Schultz (2008) said that everyone including Starbucks is facing a macroeconomic wind that points out to the fact that consumers in the U.S are facing recession. Starbucks had to change its forecasts for the opening of new stores in the U.S. and reduce the number of store openings by about five hundred stores. However there were plans to increase the number of international stores. Starbucks that had planned major expansion plans for the breakfast sandwich in 2006 decided to stop breakfast sandwiches. Starbucks outlook for 2008 was quite bleak and it was estimated that the growth would be low. James Walsh, (2008) an analyst, felt that Starbucks’ outlook for 2008 was pessimistic and that a tough year lay ahead. Steps taken to revive Starbucks Starbucks removed James L. Donald, its chief executive and recalled Mr. Howard Schultz to save the company. Howard was the man behind Starbucks’ earlier spectacular rise and on rejoining said that he would adopt a laser sharp focus to ensure that Starbucks would be different from its rivals, McDonald’s and Dunkin’ Donuts Coffee, which had earlier lured away its customers. However he added that he did not have a “silver bullet” or any short term measures to fix the problems. (Schultz, 2008) Mr. Schultz as a first step decided to lay off about a thousand employees and close down some eight thousand underperforming locations all in the United States and also reduce the opening of new stores locally. However Starbucks continued to aggressively open new stores abroad where it felt business was still strong. He decided that a part of the money that was meant for expansion domestically would instead be used for opening new stores overseas. Schultz rehired Arthur Rubinfeld to assist him to bring back the company to its former success, which they had created. Rubinfeld’s expansion strategy in his earlier stint had focused on demographics and traffic patterns and this became a model that was emulated by other retail stores worldwide. Mr. Rubinfeld in his second stint focussed on adding new stores in urban areas that had rich and young professionals as a part of its population, and placed new stores in specific neighbourhoods. For instance, Starbucks could open some stores in upmarket neighbourhoods that specialised in selling only coffee beans and expensive espresso drinks. This according to him would resemble Starbucks’ original store at Seattle and would help in reinforcing Starbucks’ position as a supplier of high quality coffee. (Rubinfeld), He also planned to change the interiors of Starbucks stores with new furniture from reclaimed materials, energy-efficient lighting, and modular racks for displaying Starbucks products. He also planned to have new paintings depicting the company’s coffee culture. Starbucks also introduced a new coffee blend, the Pike Place Roast. Another measure was to make the managers fully accountable and strictly commit themselves to achieving sales targets. Both Mr. Schultz and Mr. Rubinfeld felt that the only way they could out of the crisis was to go back to the past and restore its stores as a place where young professionals can relax. Conclusion Opinions differ as to whether luxury brands tend to fare better in times of economic hardships.. However one thing is certain. Recession can have a crippling effect. In times of recession budgets get cut and forecasts get altered. But according to Desiree Tung (2009) an Executive Director at Worldwide Business Research, "Luxury brands and their retailers with a strong differentiation strategy, clear positioning and focused plans will survive the crisis and actually come out stronger…….. Brands that can remain visible and communicate effectively with their consumers can stand to grab market share from other brands that fall by the wayside”. One needs to research the changing habits of customers as customers today are asking questions on what is important to them. Their attitudes and aspirations are going back in time. Authenticity and heritage are being given more importance in this period of instability. Hence brands have to reinvent themselves to convey these values. Simon Bell, managing director of Pod1 feels that up market brands that produce quality products of lasting value will survive the economic downturn. There is a market for luxury brands that concentrate on exclusivity and selling fewer numbers. The words of Mr. Schultz are very apt in this context. He felt that cafes can be a place of refuge in times of economic storm and that they are all the more important to our customers today than before because of the prevailing conditions. According to him having coffee in Starbucks was a unique experience. Starbucks was not selling coffee as a commodity but as a unique experience. (Schultz, 2008) The challenge of luxury brands marketing is to be different and unique. References 1. Arghavan, N. and Zaichkowsky, J.L. 2000, Do Counterfeits Devalue the Ownership of Luxury Brands? Journal of Product & Brand Management, vol. 9, no. 7, pp. 485-97. 2. Bell Simon, Quote retrieved from http://www.marketingmagazine.co.uk/news/883517/Luxury-brands-ditch-mass-market-strategy-credit-crunch-deepens/ on 10/11/09 3. Bourne, F.S. 1957, Group Influence in Marketing and Public Relations, in Some Applications of Behavioral Research, eds R. Likert and S.P. Haves, Unesco, Paris, France 4. 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