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Luxury Brands Need to Chart a Course into New Frontier Markets

September 22, 2014 • GLOBAL ECONOMY, CULTURE & LIFESTYLE, SPECIAL FEATURES, Frontier Markets, Editor’s Choice, Asia - Pacific, China, India, Middle East & Africa, Strategies for the Changing World, Unprotected Post

By Glyn Atwal and Douglas Bryson

The progressively unpredictable dynamics of the BRIC markets are now challenging luxury brands to rethink their global market strategies. Below, Glyn Atwal and Douglas Bryson argue that as luxury brands seek to adapt to new market circumstances, attention has begun to shift to new frontiers.

The market for contemporary luxury is far from being a Western phenomenon. Buoyant growth in the primary emerging markets of Brazil, Russia, India and China has helped sustain global industry expansion. It is these emerging markets – led by China – that now account for a majority of sales for an increasing number of international luxury brands. However, the progressively unpredictable dynamics of the BRIC markets are now challenging luxury brands to rethink their global market strategies. For example, in China a rising number of luxury companies are reporting a slowdown of sales; the compounded result of the slowing economic growth rate and the Chinese government’s efforts to curtail corruption is leading to the need for a change in strategy.

As luxury brands seek to adapt to these new market circumstances, attention has begun to shift to new frontiers. A perceived overdependence on the Chinese market is leading some luxury companies to diversify market risk across different geographic regions. Fast growing economies with expanding and affluent middle classes, or new frontier markets such as Azerbaijan, Columbia, Indonesia, or Nigeria are emerging as attractive potential sources of new sales growth. For example, in Malaysia the number of affluent households with an annual disposable income of more than $75,000 is forecasted to increase from 280,000 in 2012 to 458,000 by 2020.1 To keep this trend in perspective, these countries are still at a very early stage of development, and risks are not to be underestimated as a glance at the World Bank’s Ease of Doing Business Index will confirm. However, these fast growing economies offer to international premium and luxury brands conceivable sources of high long-term growth. One notable example is the increasing demand for premium standard accommodation within the African continent as a whole, driven partly by regional business travellers. International hotel companies such as Hilton International, Marriott, and Starwood are building new hotels with the objective to fill the vacuum of a clearly underserved market.

 

Luxury begins to begin at home

The hospitality sector’s investment in luxury hotels can be interpreted as a harbinger of economic prosperity. In the past, luxury goods companies have habitually sidelined new frontier market consumers as those undertaking “tourist purchases.” The wealthy elite are indeed accustomed to buying luxury goods abroad, especially in the luxury retail hubs of London, Paris, Milan, and Dubai. This is still undoubtedly the case; Harrods lists Nigerian consumers among the department store’s top 10 spenders. However, the extremely wealthy together with the growing upper middle classes who are less familiar with international travel are now starting to buy luxury brands in their home markets. This phenomenon can be certainly attributed to the growing numbers of consumers that feed the demand side of the economic equation. Supply is following demand. For example, the opening of the DuCarmo department store in Luanda has given Angola’s fashion elite access to such brands as Armani, Dolce & Gabbana, and Dior that were previously difficult to obtain inside of the country.

The rise of a vibrant and expanding luxury market within countries such as Angola represents a deeper shift in consumer sentiment. Although the prices for luxury brands are appreciably more expensive compared to Europe, and going on a spree for luxury goods may not exactly emulate the experience of shopping at Quadrilatero d’Oro in Milan, luxury consumers are not dissuaded. The recently risen luxury consumer class seeks not only the convenience of shopping at home, coupled with enjoying the “here and now,” but also the inferred status ingrained in the local nuances of what luxury means, and what it is used for. For example, “being seen” in Luanda or Lagos can infuse intense feelings of self-satisfaction, and even pride. It is no coincidence that in Nigeria, champagne is often served in fashionable restaurants or clubs with a ceremony of music, lights, and even fireworks. “Grandiosity” is the cultural expression of luxurious success. Intriguingly, Nigeria is amongst the top 20 champagne markets in the world.

 

From theory to practice

For many luxury companies, the decision to extend their reach beyond BRIC markets into new frontier markets is no longer simply a hypothetical future strategic path. Nonetheless, executives will need to find and develop innovative solutions that can turn business challenges into market strengths. Clearly, there is no singular blueprint for sustaining growth, even at a regional level. A visit to Johannesburg, Jakarta, Bogota or Baku illustrates that each emerging market context presents its own idiosyncrasies. However, we suggest the following guidelines to help strategic planners focus on the salient issues facing luxury companies in order to improve their likelihood of success.

 

The rise of a vibrant and expanding luxury market within countries such as Angola represents a deeper shift in consumer sentiment.

Preempt the growth sweet spot

Luxury executives will not only need to prioritise where to commit their limited resources, but also to decide whether the timing warrants the investment. A failure to identify the tipping point that signifies the accelerating emergence of a burgeoning consuming class could potentially lead to a competitive disadvantage. A useful method is to determine the sweet spot for the defined product category that will generate the “middle class effect,” where the size of the middle class is directly proportional to the rate of economic growth. If premium or luxury brands are able to preempt the growth sweet spot, there is also an opportunity to “pre-sell” the brand story, which can help to establish the desired positioning of an aspirational brand. This also provides a critical opportunity to develop local brand content in order to build trust and drive engagement before the expansion of the retail footprint.

 

Gauge the aspirational mindset

Although economic data is a strong indicator for purchasing power, luxury brands should also assess consumption attitudes. For example, 56% of middle class respondents in Indonesia say that it is important to maintain or exceed the standard of living of their peers, compared to fewer than 25% in Brazil.2 Luxury brands should not underestimate these consumer aspirations that lead them to acquire brands to serve as symbols of social advancement and achievement. The market significance of tier 2 and 3 cities in China and India provide testimony that aspirations, rather than income levels, are driving luxury sales. According to Bernstein Research, eight of China’s ten fastest-growing car markets in 2013 were located in lower income provinces, such as Guangxi and Gansu.3

 

Luxury brands should not underestimate these consumer aspirations that lead them to acquire brands to serve as symbols of social advancement and achievement.

Develop organisational learning capabilities

New frontier markets represent a new and untested territory for international luxury brands, and as such, the learning curve is often steep. It is therefore essential for luxury companies to acquire, build and nurture organisational learning capabilities. Ermenegildo Zegna’s proactive approach to entering new frontier markets has been central to its corporate strategy. It opened its first store in Nisantasi, Istanbul in 1991 and was the first fashion house to open a store in Nigeria in 2013. Early market entry allows Zegna not only to gain a critical understanding of the macro and micro business environments, but also valuable insights on how to liaise with government officials, bureaucrats, and policy makers. Luxury companies can also consider partnerships with local partners in order to provide learning opportunities. Although joint ventures often necessitate compromises on control and profitability, local partners can provide superior market insight and guidance on operations such as recruitment, remuneration, and negotiations.

 

Market beyond the very affluent

The very affluent in new frontier markets have been the natural target for high-end luxury companies. It is therefore no coincidence that Porsche has opened dealerships in markets including Ghana, Kazakhstan, and Columbia that have otherwise been off-limits to many mainstream luxury brands. Although the upper middle class may not be able to afford a Porsche or a Ferrari, they are susceptible to entry-level luxury products such as beauty items (e.g. Dior cosmetics) and accessories (Hermès scarves). Luxury brand managers can also draw inspiration from best practice to provide consumers access to different levels of luxury that correspond to differing levels of sophistication and ultimately price points. For example, Prada’s “brand diffusion” brand Miu Miu that has opened stores in new frontier markets, including Turkey, Malaysia, Mexico, and Morocco, is able to offer more affordable luxury to a younger and more style conscious target. However, luxury brands will need to ensure a balance between exclusivity and accessibility as evidenced by Apple’s relative failure to reach targets in many emerging markets for its “low-cost” version iPhone 5C.

 

Recognize the Cultural Identity

International luxury brand managers are often determined to present a global image that is consistent across borders. However, consumers are also searching for local cultural meaning that they can relate to at a personal level. The evidence from BRIC markets show how important it is for luxury brands to address both a need for local adaptation while maintaining an overall global approach for their brand. For example, Brazilians’ desire for immediate gratification has led to a culture of acquiring luxury on credit. In fact, more than 70 percent of luxury products are paid for with credit card installments.4 New frontier markets may be no different and the assumption that the local consumer will adapt to supposedly global norms can be a costly misconception.

 

Be prepared to redesign the business model

Marketers need to challenge if existing business models are in fact the most effective to succeed in what may be a very different market landscapes. This may require fine tuning existing models or in extreme cases a willingness to adopt a radical rethink. Luxury companies entering new frontier markets are likely not only to face regulatory constraints, but an underdeveloped retail and distribution infrastructure. India is no exception and it was a combination of these conditions and the unprecedented growth of e-commerce that led the Arcadia retail group to launch the high street fashion brand Dorothy Perkins and Miss Selfridges through specialist online fashion retailer, Jabong.

 

Move it or lose it

The democratisation of luxury is a global phenomenon. International luxury brands will need to carefully balance risk with opportunity if they are to succeed in new frontier markets. Rising income levels coupled with aspirational mindsets will lead to broader and more dynamic consumer classes. This in turn will lead to a significant and concurrent increase of investment in infrastructure, such as the opening of shopping malls with potential to create new “luxury spaces.” However, international luxury brands will need to understand the risks borne when entering new frontier markets. Lessons from market failure in the BRIC economies serve as a warning that success is far from guaranteed. Indeed, Revlon and Garnier have recently announced their exit from the Chinese market. Additional risks that are beyond the control of international companies such as economic uncertainty and political instability will need to be evaluated and managed. For instance, extreme income inequality could potentially become a barrier for economic growth and social development. However, if luxury brands executives adopt a long-term approach in sustaining global growth and stable profits, new frontier markets are smorgasbords of risks and rewards – the future winners will choose carefully and move swiftly, sensitively, and be aware that even these frontiers are not forever.


About the Authors

Glyn Atwal is Associate Professor of Marketing at the Burgundy School of Business, an international Graduate School of the French network of Grandes Ecoles. His teaching, research, and consultancy expertise focuses on marketing and strategy within affluent and luxury spaces. He has presented at leading universities worldwide, including Harvard Business School, and is co-editor of The Luxury Market in India: Maharajas to Masses (Palgrave Macmillan). Prior to academia, Glyn worked in industry for Saatchi & Saatchi, Young & Rubicam, and Publicis.

Douglas Bryson is Professor (Titulaire 1) at the ESC Rennes School of Business, France. His recent research is a mosaic of applied social psychology and consumer behavior topics, including creative work environments, international new product adoption, antecedents and consequences of brand image, and issues in international luxury brand management. Douglas is co-editor together with Glyn of Luxury Brands in Emerging Markets (Palgrave Macmillan)

 

References

1. Young, R. (2013), Malaysia revels in spending power, International New York Times, 22 November.

2. Euromonitor International (2013) Reaching the Emerging Middle Classes Beyond BRIC.

3 Mitchel, T. and Foy. H. (2014), BMW in drive to put Chinese behind the wheel, Financial Times, 14 March.

4 Mazza, M. and Stul, F. (2012) What Companies Need to Know about Brazil’s Luxury Consumers, Consumer & Shopper Insights, January, http://csi.mckinsey.com/Home/Knowledge_by_region/Americas/Brazil_luxury_consumer_retail_trends.aspx

 

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