Opinion: Is Luxury Facing a Perfect Storm? If So, It's Largely Self-Inflicted.

“An unusual combination of events or things, that produce an unusually bad or powerful result.” (Colins Dictionary.)

This is one definition of the phenomenon known as a perfect storm - used both literally to describe a weather pattern, - and metaphorically to describe just about anything big, bad and often unexpected.

It feels like a somewhat apt description of what the luxury sector is experiencing at present. Looking at personal luxury as an example: After a particularly hot-streak in recent years (18% CAGR 2020-2023; growing nearly 30% over that period - Bain) and solid growth over the longer term (6.7% CAGR 2009-2023; growing nearly 150% over that period - Bain), ‘all of a sudden’ the sector and a number of players within are now facing more challenging times. Year-to-date sales and future forecasts are down, driven by ?geopolitical uncertainty and economic pressure – in particular, the consumer post-pandemic splurge finally exhausting itself, aspirational luxury customers pulling-back on discretionary spending in the face of inflation, and China’s luxury demand remaining deflated. At the same time, a number of brands and companies are struggling to re-invent themselves meaningfully or reignite growth; the most demanding, savvy and principled luxury consumer cohorts in history – Gen Z & Alpha - continue to grow in influence, and so does the influence of social media, AI and its algorithms. And in Europe, greater scrutiny and transparency of supply chain ethics and sustainability practices are being enshrined in legislation, progressively forcing compliance and enabling regulatory interventions.

But unlike a meteorological perfect storm, in the case of the luxury sector – this one is largely of the sector’s own making …?and it could be argued, a little less unexpected.

How so? Because much of what has caused these market tremors, is directly attributable to the actions and practices of many of the brands in the sector, progressively over the past decade or more. Arguably even the knock-on effect of the economic situation depressing aspirational consumer demand, can be strongly attributed to the practices of the industry, in that allowing these consumers to become a significant component of ?brands’ sources of business - through targeting them with more affordable versions of brands’ offerings - has made brands more dependent upon them, and vulnerable to their economic confidence and spending behaviour, to say nothing of making the brands overly accessible, available and visible.

It's About First Principles.

At its core, luxury’s slow down and difficult times are in a large part the result of brands either being unaware of, ignoring, or no longer believing-in the conceptual fundamentals of luxury – those elemental, first principles that govern the existential ‘physics’ of luxury. Be it due to an insatiable appetite for growth; an impatience or short-termism; the pressures of being publicly listed (or possibly wanting to be); or some brands and companies (now) being run by people with little conceptual or strategic appreciation - let-alone love - for what luxury is all about – many brands seem to be lacking or have lost focus on the core underlying elements which determine, define and distinguish luxury. Instead, a number of brands seem to be focused mostly on the executional, surface-level characteristics of luxury - and even then, in many cases done in a generic and commoditised manner – while at the same time pursuing a commercial growth agenda and strategies more akin to non-luxury.

The now often-cited example of Gucci’s current troubles is a glaring example of the effects of this ignoring of the fundamentals. So is the controversy and disquiet Chanel has triggered through its repetitive, significant price increases and the social-media-fuelled noise about declining product quality.?

Equally – albeit on the opposite side of the coin - the re-emergence and growth of what is being called ‘quiet luxury’ and the impressive performance of brands likes Loro Piana and Brunello Cucinelli are testaments to the importance of brands delivering on these elemental foundations of luxury. As is the growth of the fine and high jewellery segments and the resurgence in interest and new product launches of watches with ‘complications.'

Some may argue these are all just part of a trend cycle. That the pendulum will swing back sooner or later. But it feels like they represent a more fundamental course-correction of the essence of luxury and what luxury-appreciating customers expect, and more importantly, value. And to this point - perhaps the most compelling argument and indicator of this assertion, is the continuing, long-term performance of Hermes (15% CAGR 2009-2023 - Stock Analysis), extending even into the current luxury turbulence (+17% Q1 20024 vs. Q1 2023 - Stock Analysis).

(Further substantiation of the case for the criticality of luxury’s fundamentals lies in the fact that without exception – the playbook for turning around fallen luxury brands and those in need of structural transformation, are all based on returning to the elemental principles. For recent examples – look no further than Tiffany & Co, Breitling, TAG Heuer - and presently - the work-in-progress that is Swarovski.)

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So, What’s Been Forgotten? What’s Missing?

Luxury brand building and management is a complex and nuanced endeavour. And the underlying principles are many. But some of the particularly notable absences include the following:

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• That luxury is and has always been for the so-called ‘elites’ in a society. Ergo, luxury is not for ‘everyone.’
• That core to luxury’s social value, is the magnitude of the gap, between how many people recognise the brand, and how many people own the brand.
• That by definition, luxury is about rare and hard to achieve excellence, extraordinariness and unique achievement. And it must be rooted and maintained at all times - first and foremost - in the products.
• That also by definition, the dream that every luxury brand needs to represent – is a dream of exception and the exceptional.
• (And) that the dream needs to be continually renewed and refreshed. Its desirability must be constantly rejuvenated, topped-up and strengthened.
• That not only the finished product itself, but also the materials used, the process of creation, the location of the creation, who is doing the creating and their time-honed savoir-faire required - are a central part of the emotion, distinctivity, authority, desirability and value of a luxury brand.
• That luxury is about being simultaneously ‘of-the-times’ and ‘timeless.’
• And, that heritage and history gives meaning, depth, distinctivity and desirability to a luxury brand’s contemporary incarnation.
• That luxury brands come from somewhere. They are the product of a distinct provenance (and culture). That the provenance must be given specific meaning, and must be constantly recharged.
• That luxury is not about being fashionable, on-trend or popular. And that a luxury brand does not follow. Rather, that Luxury is about being timeless (as mentioned already), on-the bleeding edge and individualistic.
• That central to the desirability, perceived value and pricing power of a luxury brand is its singularity and incomparability.
• (And) that the uniqueness and non-comparability is founded on a combination of the key elements of the brand that are unique to it – e.g. its origin or founder story, its specialisation, its values & personality traits, its provenance, its history-heritage-myths-and-legends, its savoir-faire, its creation process and its products. That singularity and incomparability are not manufactured from thin air.
• That luxury and fashion are structurally different concepts, business models, and economic models, tapping into very different consumer motivators and with different activation codes. And that when a single brand plays in both sectors, one-size does not fit all. The respective codes need to be utilised for each sector.
• That when operating in the lower tiers of the luxury sector, in addition to the upper tiers, with a single brand, one must continually and proactively offset the dilutionary effect on equity of the master brand, from its presence in the lower tiers.

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Luxury is Different, Distinct & Joined-up. You Can’t Be Half-Luxury.

Ultimately luxury is a specific philosophy, culture, and business model – fundamentally different to non-luxury in just about every way conceivable. Moreover, it is a holistic, integrated and self-perpetuating, self-reinforcing system. To be consistently and enduringly successful a brand needs to understand and be true to the governing principles, and then – to keep all the parts in play and in a state of relative equilibrium.

To be clear, I am not proposing that luxury cannot or should not scale. It most definitely can. But it needs to be done with eyes-wide-open, and a clear understanding of the game that’s being played and the fundaments of what it takes to ‘win’ – and keep winning.

And in a luxury environment growing ever-more filled with choice, and consumers whose knowledge of luxury continues to expand and whose levels of discernment continues to grow or mature (especially in China), and where the proverbial 1% are once again asserting their influence and tastes on the sector – it would seem perilous for brands to continue onward in defiance of or ignoring the guiding principles.