A major overhaul is happening in the luxury sector. There’s a growing desire from millennials to have a connection with a luxury brand via experiences instead of solely owning its products, Swetha Ramachandran writes on finews.first.
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Luxury companies have been traditionally perceived to be product-centric, hinged on premium pricing with a sharp focus on marketing that reinforces pricing power, hence widening the moats around the brand owners. We believe this remains valid at its core and is reinforced by the continued outperformance of the megabrands like Louis Vuitton (LVMH), Gucci and Cartier in their respective categories with high and growing margins.
However, we now live in an age of ubiquity, where classic luxury goods are available to everyone at the swipe of an app and the cachet of merely owning luxury goods has diminished somewhat as rental/resale models for circulating apparel and accessories have grown significantly.
«Consumers are shifting wallet share from pure goods ownership towards differentiated luxury experiences»»
This has led to consumers increasingly shifting wallet share from pure goods ownership towards unique and differentiated luxury «experiences» across a range of income brackets. Luxury categories, such as hospitality, fine wines and spirits, cars and high-end dining have grown faster than the consumption of personal luxury goods in the last decade.
We believe this trend will continue as the digitally native millennial and generation Z consumers become increasingly interested in cultivating their own relationships with brands, unmediated by traditional, analog marketing – be it directly on social media or via influencers or exclusive brand events.
«These consumers are the most coveted group for health and wellness-oriented companies»
For brands, these consumers – who are more like a community – can be among their most loyal acolytes and some marketing studies have shown that consumers who value personalized experiences are ten times more likely to be a brand’s most valuable consumers. They also then become unofficial brand ambassadors in a sense – by showcasing this «experiential luxury» lifestyle on social media channels (a medium which lends itself more to the sharing of experiences than of objects).
These consumers are the most coveted group for health and wellness-oriented companies such as athletic apparel retailer Lululemon, Fitbit and Allergan (manufacturer of Botox); luxury travel (eg Vail Resorts, Samsonite); unique art/artisanship (eg online retail platform Etsy, auctioneer Sotheby’s); fine wines and spirits (Moet Hennessy, Remy Cointreau) and high-end consumer tech (Sonos, Apple), just to cite a few categories.
This approach to building a brand around experiences received a bout of fresh energy some years ago by premium sportswear brands like Lululemon and Sweaty Betty who started offering yoga and workout classes in store, with customer loyalty building up organically by gaining value from such unique experiences.
«In the luxury world, LVMH is the most forward-thinking company on this subject»
Diageo more recently has discussed how its «flagship experiential store» – the Johnnie Walker House in Madrid – has helped to demystify the world of Scotch to younger consumers as well as to delight existing customers who are now able to engage directly with the brand. In the luxury world, LVMH is the most forward-thinking company on this subject as demonstrated by its acquisition of luxury hotel operator Belmond – they are of the view that experiential luxury will become a highly significant category in time.
Designer collaborations for small batch, limited edition products can be a highly effective tool to generate consumer excitement and engagement at being part of an exclusive experience to purchase these items – one only had to recently witness the long queue outside Selfridges for the launch of the Travis Scott Nike Air Jordans to be reminded of this.
«This has become so popular that it now runs bespoke tours in Mandarin»
Physical retailers in particular, seeking to reinvent their business models in the wake of digital disruption, are particularly focused on the experiential luxury trend. Harrods, for instance, has launched a perfume creation and personalization service Salon de Parfums, which already represents 25 percent of its fragrance business within a year of opening. The service also designs special wedding fragrances that are truly bespoke – to paraphrase Harrods’ MD Michael Ward people are seeking to «create that kind of memory».
Meanwhile, Australian winemaker Penfolds (part of Treasury Wine Estates) has developed a roaring trade with Chinese tourists who visit the heritage-listed winery by offering an educational and tasting experience; this has become so popular that it now runs bespoke tours in Mandarin.
«There is also a growing element of environmental responsibility influencing the purchasing behavior»
Longer-term, in a world where traditional luxury items may come under pressure from a growing war on inequality, experiential luxury offers consumers the opportunity to indulge without being seen to be out of touch with the changing times.
There is also a growing element of environmental responsibility influencing the purchasing behavior of younger generations – they tend to see a more benign environmental footprint in the indulgence of experiences rather than the acquisition of material goods.
Swetha Ramachandran is an investment manager in GAM's European Equity team. She has over 17 years of investment experience across Asian and European markets and in consumer stocks. Prior to joining GAM, she was a vice president in the Growth Equities asset management arm of Alliance Bernstein in London, and before that, an analyst at Credit Suisse, London and Vigeo (ESG Ratings Agency) in Paris. She began her career as an Asian equity analyst at Goldman Sachs in Singapore. She holds a Magistere in French Literature from Université Paris – Sorbonne, Paris, and a BSc (Hons) in Economics from the London School of Economics and Political Science, London. She is based in London.
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