Recently, a web-circulated picture of the main points of the luxury group LVMH's conference call was widely circulated, which mentioned:
Lvmh's customers are divided into three categories, ultra-high net worth (personal annual income of more than 10 million RMB or family income of 30 million RMB), high net worth (personal annual income of 3 million to 10 million or family annual income of 10 million to 30 million), no income (lower than the above two categories, are classified as no income, including students and ordinary white-collar workers).
Ultimately, LVMH intends to continue to raise prices to weed out the shrinking "no revenue" customer base.
LVMH in the face of the trend of economic downturn under the epidemic, the strategy of price increase is very correct, on the one hand, under the epidemic, the wealth of the majority of the middle class (LVMH definition of less than 3 million income groups) shrinks, in this case, they cut down on food and clothing, can save the province, the luxury goods that can be consumed before the teeth will never be consumed again, and for high-income people, their wealth is only a number, so their consumption behavior will not be affected.
In this case, it is undoubtedly a very wise decision to eliminate the middle class, which is also unable to contribute income, and raise prices for high-income people who are not affected by consumption.
The data also proves that this decision was correct.
According to incomplete statistics, Louis Vuitton (LV) alone has raised prices more than 5 times worldwide in the past year.
In the first quarter of 2022, the two major luxury giants LVMH Group and Hermès Group also performed well, with operating income of 18 billion euros and 2.77 billion euros respectively, with revenues increasing by 29% and 33% year-on-year.
In fact, the strategy of increasing the price of goods in the economic downturn has become a routine operation for luxury giants. In 2009 (a year of economic crisis), Hermès and Louis Vuitton were the only two brands to significantly increase sales by raising prices, while the Louis Vuitton brand maintained an annual growth rate of more than 10% during the economic crisis of 2008-2009.
The worse the economy, the better the luxury sales, which seems counterintuitive to our instincts. Why is this happening? The answer relates to the essential difference between luxury goods and mass goods.
01 Ferrari and Volkswagen Whose moat is deeper?
Before the analysis begins, let's first consider a question: as two different car brands, Ferrari and Volkswagen, one is a top luxury car brand, the other is a Volkswagen consumer brand, which of them has a deeper moat? Let's start with the data.
Ferrari's earnings report shows that Ferrari delivered a total of 11,155 vehicles in 2021, an increase of 22.3% year-on-year, and an increase of 10.1% over pre-epidemic deliveries in 2019, reaching a record high. "In 2021, Ferrari's EBIT margin was 25.17%.
Volkswagen Group's earnings report shows that a total of 8.9 million vehicles were sold in the global market in 2021, the lowest level in the past 10 years. According to Volkswagen, the main market, China, fell 14.8 percent. In 2021, the profit margin of the Volkswagen brand reached 3.3% (7.7% for the Group as a whole).
In 2021, Volkswagen's sales of cars are more than 80 times that of Ferrari, but the year-on-year data declines, the profit margin is only 3.3%, while the Ferrari year-on-year data has risen sharply, and the interest rate has reached nearly 8 times that of Volkswagen, even if it includes high-end brands such as Audi, Bentley, and Porsche, Ferrari's profit margin is more than 3 times that of Volkswagen Group.
In fact, for many years, Ferrari's profit margin has been more than 3 times the average operating margin of the global automotive industry that year, its sales are not affected by economic fluctuations, and it has risen steadily every year, and the previous economic crises have had little impact on its sales, pricing power and profit margins.
From the perspective of business strategy, Volkswagen is taking a path of volume, that is, through the improvement of technology and productivity, reduce production costs, and sell more cars at the right price, which is the initial success of Ford Motor. Ferrari, which positions itself as a luxury brand, does not seek sales volume, and has always adhered to a high-yield, low-risk strategy.
In the economic upswing period, the wealth of the rich and the middle class will rise, so the sales of the two brands will basically rise, but in the economic downturn period, the situation is very different, similar to LVMH sales, when the economy is down, the middle class tightens the wallet, dare not consume, they can save for non-just-needed goods, which is very deadly for Volkswagen This kind of commodity, after all, you can take a taxi or even take the subway to travel without buying a car, which is also the reason why Volkswagen fell by 14.8% in China. For Ferrari, its target customers are themselves wealthy people, and the size of their assets will basically not change their consumption behavior.
To take the most extreme example, suppose that the wealth of the rich and the middle class shrinks by 50% at the same time, the wealth of the rich shrinks from 100 million to 50 million, and the middle class shrinks from 500,000 to 250,000, who do you think will be more affected? Whose consumption behavior will change immediately?
Let's look at a contrasting example of a pair of similar brands.
In 2010, Hermès' sales were 2.4 billion euros, which was lower than H&M's 14 billion euros. However, in 2011, Hermès' brand value reached 12 billion euros, five times its global sales and 28 times its net income, according to Ming's calculations. H&M's brand value is 13 billion euros, 0.9 times its sales and 6.5 times its net income.
Hermès' sales are far less than H&M's, but its brand value is superior to that of the latter.
The moat of luxury brands is deep enough that their sales and profits rarely fluctuate with economic fluctuations, in other words, the worse the economy, the better the luxury goods sell.
02 The Anti-Marketing Rule of Luxury Goods
Luxury goods are essentially brands that are different from mass consumer goods, and they have been building their brand image and advantages through the "anti-consumer goods) marketing" law for many years, and the following is the marketing law of these brands.
Not catering to consumers but dominating customers
Mass consumer brands always like to say a word, that is, "customer-centric", which dominates their product design and production ideas, most consumer brands in the product launch when the market to adopt a follow-up strategy, follow the top brands in the market has established aesthetics, tastes, and these aesthetics, tastes are verified by consumers like.
For luxury goods, it never caters to consumers, luxury goods are always cold, confident, arrogant, they think that what I design is the most fashionable, the most tasteful, as for what do you think? Doesn't matter. Consumers often comment that some high-priced luxury goods are not good-looking, or have certain shortcomings, but luxury brands are never moved, they want to dominate consumer choices with their own brands.
Since the end of the 18th century and the beginning of the 19th century, the creators of luxury goods, well-known craftsmen, have stopped visiting their customers with deference, but instead have gone to their studios to see the latest samples and creations. In this process, artisans have been dominating the aesthetics of consumers.
Create class differences
Synonymous with mass consumer goods is democracy and equality.
The development of mass consumer goods is essentially a consumer revolution, he improves productivity as the main means to reduce prices, so that the public can enjoy goods and services, the most representative commodity is Ford Motor, which reduces the car to a price that almost everyone can buy with the production line, and promotes the revolution of automobile consumption. Later history has repeatedly demonstrated this proof, from televisions to washing machines to computers, these goods have entered the homes of ordinary people at rapidly decreasing prices.
Luxury is synonymous with class and difference.
Luxury goods have always served only a small number of people, in today's world, luxury brands are not incapable of improving production efficiency to reduce prices, but just unwilling to do so, it prefers to maintain a certain production rate to control the sales of the market, in essence, luxury goods are anti-consumer revolution. As Vincent Bastien, author of the Luxury Strategy, puts it, equality is the enemy of luxury.
Maintain scarcity
If mass consumer goods want everyone to be their own customers, luxury goods only want the rich to become their own customers.
Ferrari has deliberately kept the number of cars under 6,000 for many years, and the CEO of Hermès once said, "When a product sells too well, we stop producing it", and during the epidemic in 2020, you should have seen a lot of news of luxury goods destroyed, and the public was angry about it.
These luxury goods can maintain the scarcity of their own goods to maintain the perennial increase in prices, as well as the enhancement of brand value.
Many luxury brands have relatively less expensive entry-level products in order to get them to buy higher-priced products in the future. But they are limited to these products, and selling too many entry-level products will make the class that buys more advanced products feel offended and dilute their value. Therefore, as mentioned at the beginning, when the economy goes down, LV introduces the number of entry-level goods on the one hand, and on the other hand, raises the overall price of goods, and reduces the "incomeless" group.
Luxury does not rely on quantity to win, but on the appreciation of brands. The added value of the brand comes from the sense of exclusivity made by luxury brands, and a Porsche president once said a sentence that reflects the importance of this sense of exclusivity: When I saw two Porsches on the same road, I began to worry.
Can't get it easily
The experience of ordinary people buying luxury goods is always not so friendly, sometimes they have to queue up in front of the store to enter, sometimes they look at a bag, they are told that they are out of stock, sometimes they want to customize a car, they have to wait for months or even a year or two, they always put an obstacle when people's desires explode, preventing them from getting it smoothly.
Luxury goods do not make consumers easy to get and maintain scarcity is related, of course, scarce things are not so easy to get, want to buy Moutai at the original price? Sorry, to fight for speed, to download the official app, in short, they make everything difficult, making you feel that it is a great luck to buy goods.
This inaccessible characteristic maintains the brand image of luxury.
Do not advertise promotionally oriented
Luxury goods will advertise, but only do brand advertising, never do promotion-oriented advertising, of course, scarce things never need to be promoted. So if it is so scarce and the supply exceeds demand, why do you want to do brand advertising?
The president of BMW USA once said: "My job is to ensure that eighteen-year-old children in the United States are determined to buy a BMW as soon as they have money." I want to make sure they fall asleep at night and are dreaming of it too. ”
Shaping their own tall brand image has become the dream of most ordinary people, which is the value of luxury brand advertising.
It is estimated (Chadha and Husband, 2006) that 60% of women aged 20 to 30 in Tokyo have Louis Vuitton products, which proves that ordinary people are willing to buy an entry luxury item for a month or even a month's salary, even if they can't afford to spend a higher price, after all, this is their dream and a symbol of their status. One day, they may be consuming more expensive luxuries.
Prices keep rising over time
Most mass consumer goods will reduce prices over time, because the increase in technology and production efficiency will reduce the cost of goods, but this is not applicable to luxury goods. The price of luxury has been rising steadily over the years, which helps to maintain its brand value.
Products whose demand rises with rising prices are called "Veblen goods", "Veblen goods" are common in the luxury industry, and its existence is not very in line with the general law of the market, but in line with its characteristics of anti-marketing laws.
The growth of sales of luxury goods is achieved not by lowering prices, but in two ways, the first is to promote the continuous participation of customers who buy voluntarily, and the second is to raise the price of goods. In other words, luxury goods need to constantly circle the rich people on the planet and then constantly raise the price of goods.
03 Conclusion:
Over the years, luxury brands have used these unique marketing strategies to maintain their own high profits, promote the value of their own brands, and have been stepping up step by step and steadily rising in the competition with mass consumer brands.
Although luxury goods are mainly sold to the rich, its influence is not limited to the rich, to a greater extent, it has shaped the ideals of contemporary people for modern consumer life on a large scale. This is also the essential reason for maintaining its high profits.
【References】
Asworth Damo Dalan,"Story and Valuation"
Vincent Bastien / Jean-Noel Kapferer, "Luxury Strategy"