What are the targeted markets for the luxury industry nowadays? What are the appealing conditions that make the emerging market the preferable goal for these companies?
Questions that are totally legitim to ask, analyzed and answered in this review. In fact, the ‘developing world’ is overtaking the rest of the world as the key market for premium and luxury brands. The main reason, as you may all assumed, is related to the booming population in these countries and the burgeoning middle class that is hungry for new experiences and brands (Atwal & Bryson, 2014).
Until recently, the luxurious brands were nearly exclusive to Europe, North America and Japan. However, the expanding wealth in the emerging countries caused a shift in the wealth distribution across the world, with a booming size of the consumer base in these countries; leading to a restructuring in the global luxury landscape. The main countries involved in this shift are: China, India, Russia, Brazil, Nigeria and Mexico.
Many are going to question, how countries like India, China and Russia are new to luxury! The thing is that these nations, with so much history, had the luxury confined to their elite society – like maharajahs of India, tsars and emperors of Russia and China. But, now the wealth is growing, spreading and no longer held by the elite. This gave the new generation, the new-wealthy people, the desire to buy luxury products and the nickname “Generation AAA”. In Asia – specifically China alone- the shift made in the world’s economic center of gravity is 1,000 times larger than was witnessed during the Industrial Revolution (Kim, Remy, & Schmidt, n.d.).
WHERE lUXURY GROWTH WILL COME FROM
According to McKinsey report on cities pioneering the luxury growth (2014), the main cities that will be contributing to growth will be located in emerging markets, significantly in China, with 21 cities out of the 25 largest growth-contributing cities. This fact will represent a great leap from the status quo that was once in place with only 4 cities out of 25 found in emerging countries. Yet economic growth does not automatically mean consumption development—or luxury-market growth. Market growth in these cities is indeed conditioned by specific factors that differ from city to city. Variables such as birth rate, wealth distribution, and share of working women correspondingly affect growth in categories such as baby food, beauty products, luxury goods, and women’s fashion. To prioritize their efforts, companies will need to identify the biggest and fastest-growing cities with regard to their particular products and services.
Nevertheless, a part from China, India for example remains the world’s biggest market for gold jewelry, Brazil the biggest market for fragrance and perfumes, as for Nigeria, against all odds it’s the second market for French champagne in the world (Atwal & Bryson, 2014).
Furthermore, conferring to the same report of McKinsey, some critical market-level insights can be drawn from our analysis:
- Growth is increasingly shifting toward emerging markets across all luxury categories: in luxury ready-to-wear women market, for instance, the share in the emerging markets will grow from less than 10 percent in the last decade to more than 32 percent in 2025.
- Luxury growth is highly concentrated in cities: 85 percent of growth in the luxury-apparel market in 2025 will take places in the top 600 cities versus 66 percent for luxury beauty products and only around 40 percent for consumer-packaged goods.
- Mature cities remain critical given their absolute size: several changes will take place during the next decade, with seven new cities landing on the list of top luxury cities: Beijing, Chongqing, Guangzhou, Hong Kong, Rio de Janeiro, Shenzhen, and Tianjin. Despite the fast growth of emerging cities, the mature markets will remain the most relevant. The top 20 cities in 2025, for the luxury market, will be mostly mature-market cities, with not one Chinese city on the list and no emerging-market cities in the top five. For many luxury players, increasing market share in large Western megalopolises should be at least as important as riding the wave of growth in emerging countries.
- Growth is granular and varies by category, price point, and style: the cultural fit of a brand’s value affects the attractiveness of particular cities and can differ significantly among luxury players. For instance, luxury women’s apparel is dominated by the traditional fashion capitals, such as Milan, New York, and Paris. Spirits are strong in the Americas, while skin-care growth is concentrated in Asia.
Luxury brands and retailers are enjoying this extreme growth concentration. It will allow companies to more easily and completely focus their efforts on higher-growth areas. This analysis conducted by McKinsey, branding cities, reveal that extensive growth opportunities still exist in Europe and the United States, even in cities as large as London, Los Angeles, and Paris. This kind of analysis will help companies to assess emerging markets and to make sound investment based on facts. It will help them prioritize cities and focus their resources on targeted market-entry plans: whether in Belo Horizonte – Brazil, or Wuhan – China.
WHAT APPROACH SHOULD COMPANIES FOLLOW
Following the approach proposed by McKinsey, the city-by-city approach, can help luxury companies revamp their growth strategies and gain new insights. The new set strategies will be used to adjust the business-development models and to resource allocations.
This approach is well defined, and it serves as a basis for any future plan or strategy. However, in order to be effective and efficient, this plan requires clear answers about where to go and when. Luxury-goods companies must identify growth opportunities at the city level, generating insights on where to concentrate resources to achieve the greatest impact. This quite unusual plan, based on cities, using forward-looking market intelligence, a key enabler for ensuring that strategic decisions will allow companies to stay one step ahead of the competition. Thus, the city “attack plan” discusses, for instance the cities where companies should invest rather than the traditional market-expansion road map for which countries are the targets.
While using this scheme to ensure the global extension, companies must pay attention to several issues, such as:
- Identifying the right go-to-market model for each location: it depends on the plan of each firm. Some prefer to go alone to foreign market, where environment is safe and stable, while others prefer to establish partnerships with locals to ensure the market penetration using the local knowledge of the market.
- Determining if there is a need for local-offer customization: while preserving the brand is crucial for keeping a global reputation, it is essential that companies take local needs into consideration. So, any customization effort should be backed by a lean and responsive back-office organization, as well as a robust brand strategy.
- Ensuring global customer service: many of the people of the targeted cities travel to high-end retail shops in the pre-established cities (London, New York, Milan). In order to make a firm step forward toward venturing into new market, the companies must use those customers for collecting data and to try to understand their expectations once the brands are present in their home city. This is mandatory, for companies that prefer to work directly with no local partner.
- Gauging a need for organizational changes in the longer term: while most of the companies, possess a traditional organizational framework, this won’t provide a big help when dealing with cities that are much bigger that entire nations. For instance, comparing Switzerland with Shanghai will definitely pose a problem inside the company, because of the disproportionate size of responsibility between a country manager and a city manager that has maybe 10 to 20 times the workload.
- Choosing how to deploy or redeploy resources: allocating resources is a major setback for companies in phase of extension. Not only the financials must be allocated to get the right impact, but also the human capital that is represented by a successful country manager who’s going to be re-assigned as a city manager for a targeted city. This is usually the bottleneck for many major companies in the luxury industry.
In the end, the emerging countries, more precisely the mega-cities in these countries, are the new targets for the luxury industry. They can be easily targeted, but in order to succeed and endure the insights above must be took into consideration. The traditional frameworks, that used to be efficient and effective in the well-established countries are far from serving the same purpose in the emerging cities, while executing the “attack plan”. Moreover, many other factors should be taken into consideration: the customer, the genuine benefit of the products and the supply chain (Silverstein & Fiske, 2003).
Research and content writing
Atwal, G., & Bryson, D. (2014). Luxury Brands in Emerging Markets. Springer.
Kim, A., Remy, N., & Schmidt, J. (n.d.). The glittering power of cities for luxury growth | McKinsey & Company. Retrieved December 3, 2017, from https://www.mckinsey.com/industries…