The Luxury Market

 Abstract

A world luxury market is estimated to be valued at 317 billion dollars. It is developing by following the specific laws, barely reacts to the economic crisis, and has regular customers, whose loyalty has been formed in the course of several generations. Nevertheless, the main feature of the luxury industry is that the rules there usually define the producer, not the consumer. This and other features distinguish luxury market from the consumer goods market and determine the objective need for identification of specific marketing tools that have proven to be effective. The paper is focused on the evaluation of general aspects of the development of luxury market and its recent trends, focusing on the Middle East segment. Moreover, the paper will emphasize the particularly negative features of the current luxury market. The purpose of the research is to analyze the theoretical and methodological foundations of the luxury industry, focusing on its new geography and challenges. This industry is characterized by cyclical fluctuations and a significant dependence on the world’s economic trends, while its peculiarity lies in the goods it offers.

Keywords: luxury market, Middle East, China

The Luxury Market

The luxury goods market occupies a special niche in the world economy. Despite its instability, the global luxury market is growing more rapidly than ever before — its growth rate is 3 times higher than the growth rate of the entire global economy. Active development of the global luxury goods market in the recent years and a growing number of its customers attract the attention of scientists and entrepreneurs. In particular, analytical research in this area is dedicated to market trends, characteristics of marketing strategies, tools applicable in regard to exclusive goods and services, the characteristics and laws of the market, and others. That is why the luxury market analysis is extremely important and requires detailed consideration. The luxury market is characterized by cyclical fluctuations and a significant dependence on the world’s economic trends, and its main peculiarity lies in the goods it offers.

Basic Understanding of the Concept of Luxury in Goods

Luxury is not a commodity of basic consumption, meaning that theoretically, it is the luxurious things that the consumers first and foremost refuse from when their income level decreases. The luxury market is actively resisting the use of technologies that are developed for mass-market goods. Brands that have been marketed by the tools of classical marketing in regard to the consumer expectations help to quickly expand the target audience, but they are unable to assist in reaching that dream dimension that stimulates consumers to constantly strive for the particularly luxurious things. The key difference between luxury goods and those of everyday use is the producer’s ability to establish special long-term relationships with the consumers, which influences their behavior and self-perception. The symbolic aspects of the consumption of luxury require the highlighting of the marketing grounds of symbolism — a traditionally elusive element.

Luxury goods are those goods that give great pleasure and emphasize the high status of the owner. They are something very expensive, and if sometimes their appearance is not striking, the goods themselves are still solid and valuable. They are sold exclusively in person, with the obligatory consultation with a specialist. Often, luxury segment goods become more expensive with time, and it should be noted that their market is heterogeneous. Its structure comprises such types of products as pure-luxury, so-luxury, and newer luxury ones.

Pure-luxury type describes the traditional luxury products, and since the public is rarely aware of them, they are not advertised and are not identified beyond the target audience. The representatives of this social group see luxury as a normal and ordinary life-style. The market targets the intelligent elite that has formed its own culture of consumption of luxury brands, with no experience of other consumer products. For the elite, money is normally neither a problem nor a decisive factor when buying, because pure luxury is the most economically protected segment of the luxury market. Therefore, in times of crisis of different scales, private aircraft and yachts are sold in the approximately same amounts as during non-crisis periods. So-luxury is a traditional, rather well known luxury type which is not affordable for the majority of people. There is the highest circulation in the luxury market — it can be witnessed among the products of the most elite brands which produce mass circulation, except for the exclusive products on demand and first-line brands. The purchase of such goods for consumers is an important landmark.

Newer-luxury type evaluates the exclusive products based on goods of mass demand, usually by altering their appearance and limited edition, since they are usually created for the existing consumer base of the product. Its manufacturers tend to have no long history or traditions, and both these brands focus on label-premium segment. The consumption of such products has been rising over the last two decades, since the existing audience has clearly become less interested in classic luxury and its goods. The success of brands of newer-luxury type is largely built on successful communication and exclusivity. Today, the rich have the desire to have some “new luxury” which is not necessarily very expensive, but possesses a certain idea and drive. For example, people tend to buy such cars as Smart instead of Mercedes, and stay at home where Hemingway lived instead of a five star hotel.

In the classical economic theory, goods belonging to the category of luxury belong to the so-called normal goods, the demand for which increases with the increase in income. However, without understanding the motives of consumption of luxury by those who love and appreciate it, it is impossible to understand how the system of this industry works and for what purpose. Throughout the world, the consumers are eager to have a beautiful life. In 2013, the research agency The Boston Consulting Group (BCG) found that annual global spending on luxury goods is about $ 1.8 trillion. This huge figure consists of the following components: $ 400 million is the sale of luxury cars, $ 390 million is the sale of clothing, cosmetics, watches, and jewelry, and $ 1 billion is the cost of the luxury entertainment industry, which includes private air travel and five star hotels. Natives of China, Brazil, India, and Russia spend more and more money on it, since their combined costs comprise more than 30% of the world’s consumption of luxury goods. Only in China, this segment has increased by 15% in one year. Exclusive entertainment is another trend in the market which shows the growing popularity among the customers.

New Geography of the Luxury Market

The basis for success in the luxury market is the global brand’s popularity, because rich buyers visit the majority of countries in the world all the time. It is also obvious that the products must have excellent quality. The market is very sensitive to fluctuations in prices — the buyers can be affected by their increase, but the decline in prices is unlikely. In general, luxury segment prices are growing faster than other categories of goods. In some categories, growth is as high as 1000% in the past 30 years. The most successful luxury brands have a deep emotional connection with the consumers and create the artificially limited access. Without limiting the collection, it is almost impossible to create the hype. The largest luxury brands are Mercedes, Louis Vuitton, and Gucci — however, in comparison with global democratic giants such as Coca Cola, their capitalization is relatively small.

The year of 2016 was unsuccessful for many players in the global luxury market. It showed a drop for the first time after the financial crisis of 2008 — according to Bain & Co, there was a decrease from € 251 billion in 2015 to € 249 billion in 2016. The reason for it was a decline in growth in the key markets — sales in America, Europe, and Asia, with the exception of Japan, went down from 3% to 1%, and the fall in Europe could have been even greater if the Brexit-affected pound had not caused an increase in luxury lovers in the UK, resulting in the rise of 8%. Consumers of the Chinese market account for almost a third of all global purchases of luxury. Their increased spending on luxury goods is helpful to the market, but this fact is not capable of compensating the reduction of the tourists from China. China is becoming one of the fastest growing luxury markets in the world. The leading designers are beginning to shift their attention from such mega-cities as Shanghai and Beijing to new cities, where a new generation of Chinese billionaires is growing. International luxury manufacturers are also expanding their presence in the Chinese market. According to the experts in the market who have been working for the luxury segment for years, it has a huge growth potential. Those of the Western brands who ventured and secured their place in China in advance have already received generous returns.

In contrast to the disappointing news from the West and Asia, messages from the Middle East differ from others with their positivity. Luxury brands are opening new stores in the Persian Gulf countries, launching online sites and fashion editions. In the summer of 2016, the flagship boutique opened in Dubai, filling an area of 1103 square meters. The interior echoes the typical architectural features of the Emirates, and the assortment is complemented by collections of national Arabic clothing. A series of terrorist attacks in France and a resulting deterioration of the income of the domestic market forced French network of department stores Galeries Lafayette to look for new sources of income, one of which could be the Middle East market. This decision is dictated by the high demand for Galeries Lafayette’s products in Dubai, among other things.

If in the past, the consumers wanted to have luxury goods, now they are more interested in spending money on entertainment. Exotic journeys, delicacies, and art auctions now occupy 55% of the world luxury market. Such change of preferences reflects a completely natural process of growth of the consumer. Only after being satisfied, these consumers begin to spend money on unique sensations. This fact is confirmed by statistics, since in developing China, 29% of consumers prefer entertainment to luxury goods, while in the USA, this figure is 51%. Recently, the wealthy buyers started to focus on acquiring things that indicate their status.

Many brands began to use technology that allows customers to get the unique experience during the shopping. Louis Vuitton, for example, has allocated an entire floor that can be accessed exclusively by invitation in their new Shanghai store. This is just one example — the modern technology gives the producers a huge space for creativity.

The Role of Social Media in the New Luxury Market Trends

Digital technology is a tool that needs to be taken into serious consideration. According to the data of the last few years, wealthy buyers spend more and more time on Facebook, Instagram, Pinterest, and other social networks, meaning that previous methods of maintaining the loyalty of the customers are no longer enough. Consequently, it is worth to involve the clients in the process of creating products and services. Estée Lauder serves as a good example of it — last year, the company has launched a contest in which Facebook users could independently choose which things to put into production.

With the development of the Internet, the consumers are increasingly suffering from an overabundance of information. Therefore, they choose proven sources to obtain objective reviews on certain products. According to the survey, 76% of Americans tend to trust the opinions of experts and bloggers instead of corporate websites. Considering the previously mentioned facts, luxury-brands begin to widely use the media for advertising purposes. It might be useful if bloggers, the enthusiasts who are genuinely interested in specific products, share their impressions with the others. However, as studies have shown, the practice of paid placement of posts and presentation of gifts to popular persons on the web only harms brand’s reputation. The survey for the current study that has questioned the representatives of the target audience for luxury products shows that the consumers are most likely to suspect that something is amiss if they realize the brands seek the opinions of bloggers in this way, which might result in their lack of trust to them and to the business itself. The building of trust and sincerity not implicated by money relations with leaders of public opinion are much more meaningful methods.

Significant investments are expected in the luxury e-commerce market in the Middle East. The region is as modern as the whole world in this regard, and according to Bain & Co, online sales show particularly high growth rates in the individual luxury goods market, having increased by almost 20 times from 2003 to 2016. Feeling the prospects offered by this direction, luxury brands make their online stores affordable for regional consumers one after another. Gucci and Burberry have already provided their UAE customers with a possibility of online shopping. Saks Fifth Avenue sells goods in the Emirates online without even having its own physical store in the country. The retailer MarkaVIP has opened the road to the Internet space in the country in 2011, spending $ 5 million to enter the region. In December 2016, Ounass.com, owned by Al Tayer Group, the leader of the luxury market in the UAE, was launched. A website serving customers in the Emirates, Saudi Arabia, and Qatar presents more than 150 luxury brands. Its main competitive advantage is the quick delivery of goods, since you can get a purchase in Dubai in just two hours. Delivery to the UAE is carried out on the day of the order, and within 48 hours outside the Emirates.

In connection with the changes in the attitudes to luxury, other new models of purchases appeared. Until recently, the combination of luxury goods with products of more affordable brands was considered inappropriate, but now, such combination is widespread. The combination of accessories of prestigious luxury brands with clothes of mass producers is especially popular. During crisis, this behavior is also explained by the desire of the consumers to exclude the least functional goods in favor of most universal ones. The manufacturers of luxury goods have launched the release of cheaper goods, such as small leather things and costume jewelry, in order to expand the demand at the expense of new customers. Due to this fact, both the range of potential buyers and the volume of consumption of current customers are expanding.

However, under modern conditions, the standard economic patterns in the luxury industry are hardly applicable. There is a tradition in economics to think that luxury goods are perceived as something rare, which increases the value for those who own them. The problem of the producers is the fact that if they sell more and make profits, they will lose scarcity and exclusivity in the process, which might lead to the loss of the loyalty of the original consumers. Too often, the emerging brand becomes a mass consumer culture. The rarity of the goods can be natural or created artificially. The economic climate for companies that produce luxury goods is positive — however, according to the experts, there are some risks and problems. Thus, the economic growth in three of the four BRIC countries faced a dead end, with the only exception being India. In addition, the threats to the currency market include market volatility, the risk of rising energy prices, and potential geopolitical shocks in the Middle East and China.

Negative Trends of the Luxury Market

In the manufacture of luxury products, modern technological achievements or innovations are always used. In fact, it is in regard to this category of goods and their consumers that the new materials, components, and parts are tested, and afterward, they are used in cheaper models oriented to the mass buyer. In this regard, it should be mentioned that technological innovations mostly occur in the processes of making jewelry, watches, automobiles, and in the light industry. A person bases their purchasing decision on their rational needs, considering whether they are ready to pay more for innovations. In addition, the consumer also meets their emotional demands, as they acquire the most "advanced" product.

At the same time, globalization of the luxury market leads to a stable oppression of the environment. Transportation of luxury goods, as well as the use of luxury vehicles such as personal aircraft, yachts, and sports cars, harm the atmosphere of the planet with stable emissions and fuel waste. Procurement of raw materials for furniture — for example, wood, often takes place in one country, and processing of them happens elsewhere. At the same time, there are high costs for logistics, and valuable tree species are cut down constantly. In the production of luxury goods, only the most expensive and rare materials are used. The key requirement is naturalness, meaning natural stones and wood in decoration and furniture making, the best animal skin for clothes, accessories, and car interiors. It infringes the rights of animals and significantly harms the atmosphere.

The trend for conscious consumption keeps growing. Last year, the Copenhagen Fashion Summit, one of the largest professional events in the fashion world, was held in Copenhagen, the capital of Denmark, one of the most environmentally friendly countries in the world, aimed at solving the environmental problem in the industry. Consequently, the animal rights organization PETA acquired a stake in the French LVMH, which is a luxury manufacturer under the brands of Louis Vuitton, Dior, Guerlain, Hennesy, and others, as reported by the Financial Times. This step aims to combat the use of exotic animals' skins in the production of luxury goods. The share in LVMH will allow the organization to participate in meetings of shareholders. PETA also expects to acquire a stake in Hermes and Prada.

The problem of the modern luxury market is that many units in the world are interested in such phenomenon as eco-fashion, while most people just want to buy a beautiful and fashionable thing. If it turns out to be ecological, it will be good, but they do not care enough about this issue. In other words, in a separate segment, there is a necessity to allocate funds not for the eco-fashion, but for the production and brands that are detrimental to the environment. Conscious consumption and production should become the norm, and not vice versa. The society needs to pay attention to the new invention of Stella McCartney which will not leave anyone indifferent: thanks to a material that cannot be distinguished from genuine leather, the killing of animals — and in part, the content of fur farms, will eventually become meaningless.

In the recent years, the experts have noted a new trend. The universal attributes of elitism are being eliminated, while the individual consumption cultures of luxury are replacing them. At the same time, it is necessary to evaluate the negative influence of the luxury market on the average consumer. Despite the fact that luxury goods cannot be afforded by everyone, most people would like to have them. However, the high costs and rarity of exclusive goods make them inaccessible to the majority, which causes a negative judgment about the luxury market in general.

According to BCG researchers, under these rapidly changing conditions, the luxury brands need to take into account four aspects of today's market conditions, including many new segments and consumers whose characteristics and behavior are often difficult to analyze. Expanding geography of the market activities and individual features of megacities also need to be taken into account. Furthermore, openness and interconnectedness of the modern world are important, requiring the development of the innovative business model, and the role of digital technologies and social networks is essential.

Conclusion

Goods related to luxury are those that are more expensive while having the same consumer properties and qualities. Their intangible features are more important than the material they are made from — however, the concept that luxury is bought exclusively for demonstrative purposes disappears when we compare, for example, the properties of lipstick: outwardly, the differences will be invisible and the price will be similar, but the motives behind purchases will differ. As a result, among the driving forces of the development of the world luxury market, there are both objective material factors and subjective cultural factors. Thus, the luxury market is a market segment which provides high quality of the expensive, exclusive products purchased not out of necessity, but for fun, designed for a specific wealthy audience. Further studies are needed to determine the principles of successful brand management for each of the product categories of the luxury market.

The article was composed and written by professional writer Olivia Adamson, more her papers you can find at freshessay discussion post help