The dilemma of luxury brands in Asia

Monday 28th, March 2016

The clear message is that different countries in East and West perceive luxuries very differently.
From Louis Vuitton to Chanel, Rolls Royce to Johnny Walker, Asian markets have become vital for the growth of luxury brands. Asia turned over some US $90bn in luxuries in 2014 according to Euromonitor, roughly tied with North America and not far behind Western Europe. The region is also forecast to be the main driver for growth among these big markets over the next five years, as the chart below suggests.

Xerago comment: For the last decade or more, as Asia’s newly-minted rich have stepped out of the shadows they have become an attractive target for manufacturers of luxury goods everywhere. Wealthy consumers in the US and Europe have had access to luxury brands for decades now and growth had begun to slow.

The boom in China came as a shot in the arm for luxury brands that would otherwise have struggled to grow their topline in their home markets. While it is well known that luxury brands are price-inelastic, the fact is that there is only so much organic growth that they could have expected.

Such recent optimism also hides the fact that many brands and in some cases, industries had been struggling to stay afloat. The classic example cited is Swiss watches which took a body blow in the seventies when the Japanese invaded the markets with cheap, trendy watches. The fortunes of luxury brands in the West are often linked to fashion trends that can change from time to time, two good examples being the movement against fur and animal-based leather products.

But there’s a paradox. The marketing strategies for many luxury brands are not producing the desired returns in that part of the world. So what’s the problem; and what can be done about it?

We all buy and consume what we believe offers value. It is one of the fundamental drivers of people’s purchasing decisions. For products that we buy regularly, the value that we perceive is largely a trade-off between what it costs, mainly in terms of price, and the benefits in terms of how useful it is. In other words the more useful a product to us, the higher the price we are willing to pay.

Xerago comment: Not necessary. We would argue that a premium brand can command a higher price. In many daily-use categories or even increasingly, durables consumers are increasingly looking for brands/products that offer a strong value proposition. And that particularly in Asia means a brand that is able to get the sweet spot between a lower price yet offering the functionality that a more premium brand offers.

Ironically, Asian companies and brands understand this very well. It may be argued that the products of Chinese mobile companies such as Xiaomi and Huawei are targeted at such an audience.

With luxury goods this equation becomes more complex. Here the costs are high and the benefits are not just about utility, but much more about personal pleasure and social status. But what many luxury businesses don’t understand well enough is how this varies between different countries.

Many a time on my travels I have seen the same adverts, messages and communications employed by luxury brands across the world to serve vastly different markets. Sure enough, analysts say one key reason why some luxury brands underperform in Asia is because their owners see Asian and Western markets as homogenous.

Xerago comment: It is tempting to dub luxury brand owners (most of whom are typically Western businesses) as being overly-simplistic in perceiving Western and Asian markets as homogenous. The fact remains that any luxury brand – whether a Gucci, Prada, Hermes, Ferrari or an Audemars Piguet – carries a cachet of qualities that makes it uniformly desirable across the world. And that is what draws audiences to the brand – both new and repeat.

It seems many luxury businesses have erred in believing in the universality of their brand’s message. This is baffling when analysts and researchers like me tend to emphasize the diversity of individual markets in terms of geography, demography, culture and consumption patterns. To find out more about the distinctions in relation to luxuries, my co-authors and I asked 900 luxury consumers about how they see the value of such products in the UK and in leading emerging luxury markets including India, China and Indonesia.

Xerago comment:

Imagine if you will that you’re a brand manager with a luxury brand. A research report lands on your table highlighting the differences between various emerging markets. What would your assessment be and how would you tailor your brand strategies in response?

This is the challenge facing any brand, not just luxury ones. The essence of a brand is the core message that it conveys to its audiences. A Ferrari is the epitome of pulse-pounding on-road excitement to its owner and that does not change whether in California or Chengdu.

East vs West

Indian luxury consumers are particularly influenced by what others think of them. They consume to achieve societal acceptance, reflecting the hierarchical nature of the society. They use luxury brands to indicate social status, symbolizing achievement, wealth and prestige. Shopping for luxuries is fundamentally not an individual experience. Instead it seems rooted in group decisions, meaning that people’s choices of luxury purchases are directed towards others rather than themselves.

Xerago comment: Indian society has gone through a long and torturous process of evolution. While there was a time not so long ago when the rich felt embarrassed about displaying their wealth, things have changed. The authors have rightly concluded that luxury brands are used to send out powerful messages about a person’s standing in society. Make no mistake though that there is as much an individual element at work here, reflecting the fact that the individual sees himself as successful and entitled to reward himself with the best.

Contrast Indonesia, where the culture revolves around how you judge yourself, not how others see you. Indonesians seek to enhance themselves through consumption. Despite the general perception of the country as a collectivist society where people tend to see themselves as similar, consumers won’t follow the recommendations of others if the choice is distasteful to them. They also value luxuries as an enjoyable experience, and may buy such goods as a distraction from the problems in their lives.

In China, despite spending more on luxuries than even the US, the country’s attitude to this market has been strained in recent years. In 2013 luxury advertising on television and radio was banned, which may explain why consumers do not strongly attach such purchases to social status or personal pleasure. Even the country’s premier got involved, calling on Chinese officials to refrain from luxury gift giving.

Xerago comment: There is another factor that is less publicly commented upon in relation to luxury purchases. In old economies like India and China a position of influence or power based on association are strong influencing factors that help individuals gain power or prestige unlike rather more egalitarian, meritocratic Western societies. Typically, this may mean that a politician or a bureaucrat in these countries would be in the list of the affluent although their profiles may indicate otherwise. It is this ‘invisible’ class that accounts for a great deal of luxury purchases, particularly personal adornment such as jewellery, watches, pens, sunglasses and so on.

But what we found was still very important to Chinese consumers and also to a lesser extent those in India and Indonesia is the quality that luxury brands represent. They are willing to pay a premium price as a result.

In Britain, meanwhile, consumers attach less psychological meaning to luxury goods than in India, China and Indonesia. They are not swayed significantly by the pleasures offered by these brands; which may partly be because many brands have long since gone mass market. Analysts have observed that the likes of LVMH and Gucci have lost their luster because they are widely available both in the UK and in other developed markets (the report costs 800 pounds; a sign that luxuries is a valuable business).

The Execution Question

The question for the people who sell luxury brands is how they should be applying these insights in their marketing strategies. Much of it follows logically. Given that consumers in India and the UK care more about what others think of their purchases, for instance, they are likely to be drawn by messages about the product’s social acceptability and by symbolism connected to achievement, prestige and wealth.

In Indonesia, you would want to customize the sales pitch to include some emphasis on how a brand could enhance a consumer’s sense of self and make them feel good about themselves. You would also focus on the experiential aspects of buying and using the brand.

Because of the way the government has been intervening against luxury purchases in China, pursuing consumers requires a far more subtle approach away from the bans on television and radio, of course. Connecting the idea of buying luxury brands with personal identity and pleasure may be the best strategy.

At the same time it would be important to emphasize quality, not only in China but also in the other three countries too. The fact that consumers in all these markets thought that a product’s functional value was important indicates one area where the same kinds of messages might cut through pointing to at least some potential for economies of scale.

Xerago comment: We’re not inclined to agree with the author’s recommendations. While individual markets may have their own peculiarities, from a brand management standpoint this is a prescription for disaster. The marketing/brand message should always have a core component that would be rooted in the brand values. To change this from country to country would be a recipe for disaster. We are hard-pressed to think of any luxury brand that follows a different approach from one country to the next.

To be sure, there may be tactical messages that some luxury brands may employ from time to time. For example, it could relate to an annual sale or a special festival-oriented promotion which could temporarily widen the audience base and lead to an increase in sales.

After all, as the saying goes why fix it when it ain’t broke?

Aside from this, the clear message is that different countries in East and West perceive luxuries very differently. However much it is convenient to treat the world as one market, it doesn’t fit the reality on the ground.

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