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Nov07

Managing Luxury Brands in a Group during a Downturn

Managing Luxury Brands in a Group during a Downturn

There is a huge potential market for luxury goods because still there are millions if not billions who are effectively economically disenfranchised through poverty or lack of means impeded by social or political conditions. Many of these people have access to media which portrays the middle class and elite enjoying lifestyles of which they can only dream. Often the successful wear the badges of success, recognizable emblems and symbols, and today these are the luxury brands. One of these is Louis Vuitton which has with many of the other brands in the LMVH group portfolio been successful over the years in surviving the recessions through innovative redesign and nurturing of new markets, especially in Asia. Forecasters believe that in the next decade China with its burgeoning middle class will become one of the major drivers in the luxury market ( the demographics attest to this potential) , and already there are plans afoot to prepare for an influx of Chinese tourists to the world’s luxury goods citadel, Paris, the home of Louis Vuitton. However, there are several problems with a strategy that privileges China over other markets. Firstly, there might be the problem of real structural problems in the Chinese economy. All might not be as it seems. Indeed the key Chinese municipalities are in debt to nearly two trillion. There is the possibility of a property bubble bursting in the near future, the repercussions of which could dwarf a similar bubble in the Japanese economy in the late twentieth century. On top of this there might be a political resistance from the Communist party that has been clamping down on conspicuous consumption by its elite as it incenses the poorer classes who form the majority.  In addition to these economic and political issues, one can see that in the case of Louis Vuitton that over exposure of the brand, saturation of the market due to counterfeit products, and greater brand awareness  among the Chinese middle class consumers will effect  the future sales. The company cannot rely on point of register sales from its shops, since it is conceivable that the Chinese consumer although aware of the kudos of  purchasing an original bag NOT MADE IN CHINA  or a mark-up bought in Hong Kong, might shift focus due to several of the above factors. Of course Louis Vuitton is a survivor, however its losses of sales in the recent months, has worried the market and in turn brought about concern about the portfolio of LMVH. Since Louis Vuitton is the brand flagship of the group, if it sinks, then the Group will sink. What then can be done in such a situation? One obvious solution would be to seek a new niche market. Others include brand extension, co-branding, shift of focus regarding the leading brand, etc. An extreme measure would be to sell some of the companies. But in this short article, another solution is proposed, namely group brand synergy through risk aversion modeling.
In large to middle sized groups there may be seventy to twenty companies in the group portfolio, and depending on the stance of the holding company, these companies might be similar or very diverse. In the case of LMVH various factors have led to the portfolio, but the principal factors are that the companies be French and luxury products or services. The fact the holding company and group companies are French and have principal board members who are French is important in branding.
The concept of brand synergy is similar to company synergy whereby a company’s departments are in creative competition – teams rival each other for results and benchmarks and these in turn lift the company as a whole due to new perspectives arising, and increase in stakeholder confidence, etc. In the case of the luxury brand group the synergy is created by risk aversion triads. Here two companies with lower risk aversion in terms of brand equity are brought together in a strong  or double coupling. The brands and their products should not be from the same sector, however they should also not be too remote. One can use the rainmaker model in order to establish the degree of remoteness and level of risk. A third company in this triad is riskier and has looser or single coupling. The brand equity of the third is less than the two dominant brands. The two brands develop a co-brand or extend their brands. A small and discrete team of brand managers is formed for this purpose. They are joined by the third brand managers which can add input. As the co-brands or brand extensions are brought in, the third brand is through association valued more than before, enjoying both collateral and mutual benefit from association, thus leading to an increase in brand equity. These triads are firewalled against the equity of the core brands. They can however lead to new products that are innovative and attractive to growing markets. If the brand synergy model is carried out group-wide then not only will the participating companies benefit, but it will benefit the group as a whole, leading to better results and maintaining the kind of profile required by both stakeholders and investors alike. The model can be utilized also to help the group penetrate new markets. In this scenario the coupling of the triad is different. One could for example choose two companies in the group with lower equity than others, though still using the risk aversion algorithm to assess the fitness of coupling. The third company is external. The two dominant companies work on a strategy that will include the third company’s brand and products. Again the third company benefits from association, whereas in the brand campaigns the dominant group companies will enjoy a higher profile in the potential market. They will also benefit from the input of the third company with respect to the market’s culture. This will help in two areas: firstly, brand and cultural integration, i.e., in fulfilling the expectations regarding to luxury and pricing; secondly, in cultural differentiation, i.e., to maintain the connotations of Frenchness.  On top of this, the development of co-brands or brand extension avoids risk to the core brand.
Bearing in mind the risk of a connection with an external foreign company, one should spread the risk by adopting similar strategies (low key, low resourced couplings throughout the group) with companies of comparable equity stature in the target market. Each of these couplings will be with companies which are in not in competition or in the primary sector. This will lead to new brand markets and increase the brand exposure as well as achieve market penetration cheaply at mutual benefit to partner brands.

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