Question

We prefer the Blue Circle Café to the Sotto Vento’, exclaims Sten, the son of a Norwegian millionaire. The Sotto Vento is on the exclusive Costa Smeralda, and is Sardinia’s most famous disco but, says Sten, ‘is already being invaded by “the Rolex crowd”.’ Sten has a point. While most people never aspire to owning a pair of A2,000 Gucci crocodile skin loafers, some do. According to Sten, those who want to show off such belongings go to Antibes or St Tropez. Costa Smeralda is different. The likes of Sylvester Stallone, Tom Cruise and Nicole Kidman go there so as not to be seen. They do not wear Gucci, Prada or Versace to display their success but because that is what their local store sells. Whereas luxury brands bestow glamour to ordinary mortals, the super-rich who holiday at Costa Smeralda bestow glamour to the luxury brands. Costa Smeralda retains its exclusivity by staying small, being well guarded and being accessible only by helicopter or cabin cruiser. However, life has recently not been so easy for the luxury brands that adorn its visitors. Many of the luxury-brand makers were founded in the 1950s by mainly Italian entrepreneur designers who are now ageing and whose families lack the design and management skills to run an increasingly competitive business. Luxury-goods sales have also been hit hard by the worldwide economic slowdown. The ‘new idea’ for luxury-goods makers is to control the whole value chain, from manufacture to distribution, retailing and marketing. This comes expensive where advertising costs approach 35 per cent of sales and the rental of the prime retail site they need can cost up to A10,000 per square metre. Covering such costs requires the sales volume and working capital that many of the family firms lack. According to Cedric Magnelia, of Credit Suisse First Boston, gaining sales by brand extensions into such obvious areas as perfumes has been ‘done to death’. There also seems little further to gain from the ‘old idea’ of designers creating stunning but hugely loss-making haute couture while money was made from licensees selling perfumes, handbags and scarves. Down-market associations easily taint luxury brands. TAG Heuer and Porsche both tried stretching their product ranges down-market. Both increased sales, tarnished their luxury brand names and retreated back up-market. The formation of luxury conglomerates has become part of the ‘new idea’. These offers negotiating power in obtaining retail space,
skills in areas where brands could be extended, access to capital and managerial skills. Two of the biggest of these are French LVHM, who own Louis Vuitton, Christian Dior, Givenchy and others, and Swiss Richemont, whose brands include Cartier, Dunhill and Piaget. The recognition of the conglomerate strategy has led to a feeding frenzy as Gucci consume Italian shoemaker Sergio Rossi, and LVHM and Prada jointly share out Fendi with its famous Baguette handbag. Laurent Paichot, of the Federation of Swiss Watch Makers, thinks being bought by a conglomerate is the only alternative for many small watchmakers: ‘Due to globalisation everything is expensive – especially advertising.’ He continues, ‘Bigger companies have the economic power to really push the product and consumers will buy from a brand they know well.’ However, in this industry, synergy is hard to find. Morgan Stanley Dean Witter’s Claire Kent says ‘cost savings in a takeover in this industry are spurious’. How can synergy be achieved in a market where the appeal is the idiosyncratic way products are designed, made and marketed? Hermès boasts that it takes them longer to make their Kelly bags than it takes BMW to assemble a car! Even where cost savings are easy and logical to find, they can endanger brands. Richemont is eager to clarify that Mont Blanc factories do not make Cartier pens. LVHM’s broad range and strength in the Japanese market have helped it weather the economic storm better than many of its competitors. Its performance contrasts with that of Gucci whose sales are heavily down because of merchandising errors and excessive time turning round Yves St Laurent, a struggling acquisition. A few luxury-goods makers, such as Rolex, Mondane Watch and Prada, are holding out against the force of the ‘new idea’. Mondane intends to remain a speciality watchmaker while Rolex is adamant that it will remain independent, although it seems unlikely that Sten will be wearing one.

Questions
1. What makes a luxury good or service desirable? 10 marks
2. Is the economic drive for scale inconsistent with consumers’ desires in the a60 billion luxury-goods industry? 10 marks
3. Does Sten’s sneering at ‘the Rolex crowd’ suggest that Rolex is failing in its desire to remain an independent luxury-goods maker? 10 marks​

Answer 1

Answer:

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