QUESTIONS:

1. Using the five forces framework, how would you characterize the competition in the luxury goods industry?

2. How much bargaining power did consumers as buyers have during the Great Recession?

3. Why was discounting looked down upon by industry peers, all of which were differentiated or focus competitors?

4. What would be the likely challenges in emerging markets for luxury goods firms?

Emerging Markets: High Fashion Fights Recession Pumping out fancy clothing, handbags, jewelry, perfumes, and watches, the high end of the fashion industry- otherwise known as the luxury goods industryhad a challenging time in the Great Recession. In 2008, banks were falling left and right, unemployment rates sky high, and consumer confidence at an all time low. In 2009, total luxury goods industry sales fell by 20%. How did the industry cope? Of the five forces, the threat of substitutes was relatively insignificant. Potential new entrants were not dying to enter when incumbents were struggling. Suppliers such as leather tanneries were hit hard by cancelled or scaled- down orders from auto companies, shoemakers, and furniture firms. Suppliers thus were eager to work with any order that luxury goods firms could lavish on them. As a result, managing industry competition boiled down to how to manage rivalry among competitors and manage customers. The high-end fashion industry was dominated by the Big Three: LVMH (with more than 50 brands such as Louis Vuitton handbags, Mot Hennessy liquor, Christian Dior cosmetics, TAG Heuer watches, and Bulgari jewlery), Gucci Group (with nine brands such as Gucci handbags, Yves Saint Laurent clothing, and Sergio Rossi shoes), and Burberry (famous for raincoats and handbags). Next were a number of more specialized players such as king of mens-wear Ermenegildo Zegna and queen of womenswear Christian Lacroix. Virtually all firms in this industry pursued a differentiation strategy and a smaller number of them engage in a focus strategy. By definition, high fashion means high prices. An informal code of conduct (or norm) permeates the industry: no discount, no coupons, no price wars pleasein theory at least. Discounting, so frequently used in the low-end fashion industry, is generally viewed as dangerous and poisonous, not only to the occasional firm that unleashes it, but also to the image and margin of the whole world of high fashion. But here is the catch: How do firms survive the Great Recession when such nasty tactics are not advised? In desperation, many firms cut pricesbut quietly. At Tiffany jewelry stores, sales people advised customers about diamond ring price reductions, but otherwise there was no publicity. Gucci and Richemont (with brands such as Cartier jewelry, Vacheron Constantin watches, and Alfred Dunhill menswear) offloaded their excess inventory to discount websites. Coach launched a lower-priced line branded Poppy as a fighter brand without cheapening the image of the Coach brand. During the month prior to Christmas in 2008, American department stores such as Macy's and Saks Fifth Avenue offered some savage price slashing of up to 80% of some luxury goods. The only firm that stood rock solid was the industry leader LVMH, which claimed that it never puts its products on sales at a discount. When the going gets tough, it destroys stock instead. In contrast to many luxury goods firms that rely on department stores, LVMH owns its retail shops, thus allowing it to completely control the fate and price of its own products. The bloodbath in the Great Recession forced the weaker players such as Christian Lacroix and Escada to file for bankruptcy. But it made stronger players such as LVMH even more formidable. They benefitted from an established pattern in high fashion: the flight to quality. In other words, when people have less money, they spend it on the best Shoppers go for fewer, more classic items, such as one Burberry raincoat (as opposed to two designer dresses) and one Kelly bag by Herms (rather than three bags by less prestigious brands). For this reason, LVMH, according to its proud president, "always gains market share in crises." LVMH's sales grew from $24 billion in 2008 to $29 billion in 2011, with profit margins at a healthy 40% or so-twice as high as some of its weaker rivals. In addition to managing interfirm rivalry, how to manage the fickle and capricious customers was tricky. Although the seriously rich were not affected by the Great Recession, their number remained small. Most luxury goods firms had been relying on the "aspirational" customers to fund their growth. As the recession became worse, many middle-class customers in economically depressed, developed economies began to hunt for value instead of triviality and showing off. Japan had been the number one market for luxury goods for years and most Japanese women reportedly owned at least one Louis Vuitton product. But sales were falling since 2005 and dropped sharply since 2008. Young Japanese women seemed more individualistic than their mothers, and often hauled home lesser-known (and cheaper) brands. Emerging markets, especially China, offered luxury goods firms the best hope while the rest of the world was bleak. Since 2008, while global sales declined, Chinese consumption (both at home and traveling) had been growing between 20% and 30%. In 2009, China surpassed the United States to become the world's second-largest market. In 2011, China rocketed ahead of Japan for the first time as the world's champion consumer of luxury goods-splashing $12.6 billion to command a 28% global market share. Everybody that was somebody in high fashion had been elbowing its way into China, which appears like the New World to old European brands. Interestingly, several years ago it was the Japanese ladies who did the heavy lifting for the top line of luxury goods firms; now it is the Chinese dudes who (are more likely than Chinese women to) eagerly open their wallets to indulge themselves with luxurious trappings. Beyond China, luxury goods firms eagerly chased customers in Brazil, India, Poland, Russia, and Saudi Arabia