LONDON, United Kingdom — We are living in turbulent times. Social inequality has increased significantly and the middle classes in many developed countries have been feeling disillusioned and ripped off about their futures by their governments. In recent elections — the Italian referendum, the ‘Brexit’ vote, the victory of the Republican candidate Donald Trump in the US — we have seen anti-establishment votes; votes for discontinuity.
But these votes have created uncertainty, which can be a headwind for the luxury industry. In fact, like any business that relies on discretionary spending, luxury is supported by economic growth and stability. When consumers feel good, rich and safe, they are more inclined to buy luxury products.
In times of uncertainty, when consumers are not as willing to buy luxury, brands have to be more appealing than ever to stimulate purchases. They have to stimulate demand through new desirable products: innovation and creativity are key if they are to succeed when customer confidence is subdued.
Another way for brands to sustain sales when consumers’ discretionary spending is volatile, is to communicate value for money. This means creating products that offer high quality at the right price. It doesn’t matter if a product is very highly priced, if the quality is unique and the consumer feels it offers value for money, they will be willing to buy it. At the same time, brands can also introduce products that have slightly lower price points, so they are easier for the consumer to digest.
In these markets where there is a lot of turbulence, the first thing to look at is economic growth, which is the biggest driver for luxury demand. For example, if the new policies that US President Donald Trump puts in place boost economic growth and especially if they benefit the wealthy, who are the main consumers of luxury goods, the American consumer will be more keen to spend and it will be a positive for luxury. On the other hand, Trump’s protectionist trade barriers will increase taxes for luxury goods imported from abroad, which is not good.
However, when you’ve got ideas of nationalism and protectionism gathering momentum in a certain country, that could create headwinds for international luxury brands who export to that country, as domestic brands’ appeal gets stronger. What brands have to do is to communicate their uniqueness, so consumers don’t feel they are buying a product that is in competition with a domestic brand, but something different, which is not available domestically. Luxury brands need to work on communicating what sets them apart to consumers. In some cases, brands can also decide to produce locally certain products, which are tailored to a specific consumer base. The talks that took place between Bernard Arnault, chairman and chief executive officer of LVMH, and President Trump about potentially building a Louis Vuitton factory in the US could be heading in this direction.
Ultimately, anything that limits free trade or the free movement of people is not good for global businesses like luxury. However, personal luxury goods (like leather goods, apparel, watches and jewellery) can be bought when travelling abroad, partially reducing the headwinds created by possible import tariffs in specific countries. For other luxury products, like high-end cars, this is not possible.
As told to Helena Pike.
Mario Ortelli is head of the luxury good sector at Sanford C. Bernstein.