1

Midhun P. Abraham

ISBR

MBA 2015-17 B Section

Topic:

A comparison study of luxury goods sector

and consumer goods sector.

Luxury goods

Definition of luxury products by Dubois, Laurent and Czellar (2001):

Source:

The concept of luxury brands - Klaus Heine

2

A luxury good may become a normal good or even an inferior good at

different income levels, e.g. a wealthy person stops buying increasing numbers

of luxury cars for his automobile collection to start collecting airplanes (at such an

income level, the luxury car would become an inferior good). (Philip Kotler)

The three dominant trends in the global luxury goods market

are globalization, consolidation, and diversification.

Globalization is a result of the increased availability of these goods,

additional luxury brands, and an increase in tourism.

Consolidation involves the growth of big companies and ownership of

brands across many segments of luxury products. Examples

include LVMH, Richemont, and Kering, which dominate the market

in areas ranging from luxury drinks to fashion and cosmetics.

Companies explore diversification to get a valuable comparison

between their strategy and expansion. Leading global consumer

companies, such as Procter & Gamble, are also attracted to the luxury

industry, due to the difficulty of making a profit in the mass consumer

goods market.

(Global Powers of Luxury Goods report by Deloitte)

3

Consumer goods

Consumer goods are products that are purchased for consumption by the

average consumer. Alternatively called final goods, consumer goods are the end

result of production and manufacturing and are what a consumer will see on the

store shelf. Clothing, food and jewelry are all examples of consumer goods. Basic

materials such as copper are not considered consumer goods because they must be

transformed into usable products.

The consumer goods industry is closely connected with other industries such

as manufacturing and technology. For its survival and progress, it depends a great

deal on advertising through various media and on retail outlets, such as shops,

malls, franchise stores, discount stores, and online platforms. Consumer goods

companies find themselves jostling with one another for market share, and they

take brand-building and product differentiation seriously. Many of the top players

are big conglomerates with wide portfolios of products. The largest market for the

consumer goods industry is the US, followed by China. India, Indonesia, Brazil,

Mexico, and other developing countries are expected to be the new growth engines

for the sector. (Trends that will shape the consumer goods industry 2010- McKinsey and company)

4

The market

Luxury range of products:

The Luxury brand companies at present cover a spectrum of luxury positioning

from traditional ultra-luxury, through super premium and aspirational luxury, down

to affordable/mass luxury—a relatively new luxury category of products at prices

more affordable for middle class consumers but available at the higher end of

retail.

Factors affecting companies’ position on the luxury spectrum include:

• price premium

• quality/rarity of raw materials

• quality of craftsmanship

• product exclusivity

• service and personalisation

• quality and exclusivity of points of sale

(Klaus Heine)

Consumer goods:

Consumer goods companies have expanded rapidly beyond their traditional

Western bases. They have invested heavily in building global scale along every

part of the value chain, including R&D, marketing and sales, procurement,

manufacturing, and distribution.

5

The upheavals in global consumer, retail, and supply markets over the

coming decade threaten to wreak havoc on established business models and

marketing approaches—and promise huge rewards for those best able to anticipate

new opportunities.

The challenges

Luxury range of products:

The main challenge facing most luxury brands is establishing the right pricing

model.

Luxury brands also face tough issues in rethinking the size of their store

footprint and the role of brick-and-mortar shops in a world of growing

digitization, as well as figuring out how to delight local customers even as

masses of tourists flock to establishments in mature markets.

Economic growth in three of the four BRIC economies has either stalled or

decelerated, the exception being India. Moreover, currency market volatility has

thrown a wrench into the best laid plans of many companies.

Possibility of a rise in energy prices, a drop in asset prices, and potential

geopolitical shocks in such places as the Middle East and the South China Sea.

Consumer goods:

A billion new middle-class consumers in emerging markets

Consumers going ‘green’

The impact of demographic shifts

6

Rise of digital consumers

Health and wellness concerns

Modernization and concentration of trade

The shift to value

Rising trade protectionism

Changing tax regimes

Increasingly volatile input costs, driven by natural-resource

shortages and the emergence of fewer, bigger suppliers

Labor shortages in emerging Markets

(Trends that will shape the consumer goods industry 2010- McKinsey and company)

More opportunities in the sectors

Luxury range of products:

Following the digital revolution, there will be new investment in

luxury smart home devices. Just as leading luxury brands have followed Apple into

smartwatches, so they will want to cash in on smart home trends too.

There will be growth in brands offering luxury reward programmes,

like many brands in the retail industry, luxury retailers are necessarily adapting to

the digitalisation of consumer lifestyles.

There will be a blurring of physical platforms as big-name brands and

companies look to bring the functionality of the internet into their stores. For

example, so-called ‘magic mirrors’ with high-definition cameras that transport

7

shoppers to catwalks, or advise them on the apparel, accessories and beauty

products they should buy.

Stronger global demand for luxury experiences such as fine dining,

lavish holidays and beauty pampering, often as alternatives to luxury brands per se,

will entice leading fashion houses to build bigger footprints in areas such as luxury

travel, luxury foodservice and luxury health and wellness.

Ageing populations are a common thread among the world’s biggest

luxury goods markets. Finding new ways to tap into this market will be integral to

brand strategies in coming years.

India will be the ‘star of asia’ and the only major market in the world

to register double-digit year-on-year growth in us dollar terms. Luxury goods in

India will grow by around 15% this year, fuelled by a slowdown in the black

market and a commensurate uptick in the formal market.

Consumer goods:

The global middle class will expand dramatically; by 2020 there are

expected to be more than 1 billion new consumers spending between $10

and $100 per day.

To capture fair share of rapidly growing online channels, consumer goods

companies must raise their game with online retailers. They must work in

close partnership with retailers to manage their online shelf space,run joint

targeted campaigns, and in general expand the category online.

Involvement in social media helps to explore new capabilities, including

rigorous performance tracking, extensive digital-marketing analytics, and

flexible vendor management. Winning consumer goods companies will be

those that invest in these capabilities to keep pace with the digital

consumer.

8

Consumers are looking ways to save money. Consumer goods players are

employing a variety of strategies to address this trend. Some companies are

trying to minimize retailers’ need to launch their own private label brands.

Some companies are rationalizing their price lists to help retailers control

SKU proliferation. Stock Keeping Unit (SKU) is used to measure the

number of distinct items that a company produces and markets.

Consumer goods companies will need to find innovative ways to meet the

needs of aging consumers. Moreover, despite the global aging trend,

pockets of younger consumers are growing in key markets. These micro-

demographic shifts create additional opportunities for companies to capture

growth.

From the supply side, volatile input costs are increasing, driven by the

emergence of bigger, fewer suppliers and natural-resource shortages.

Consumer goods companies face some tough strategic decisions to manage

increased volatility—including the price they are willing to pay to secure

long-term supply stability, how to reduce commodity and natural-resource

inputs across the product line, and how to build flexibility into their supply

chains. Navigating exposure to this volatility requires a new paradigm in

risk management.

9

BIBLIOGRAPHY

Websites:

https://en.wikipedia.org

http://www.investopedia.com/

http://blog.euromonitor.com/

http://www.chron.com/

Journals:

The concept of luxury brands, The Taxonomy of Luxury, Handbook for the Creation of

Luxury Products and Brands - Klaus Heine.

Global Powers of Luxury Goods report - Deloitte Touche Tohmatsu Limited

The decade ahead: Trends that will shape the consumer goods industry 2010 - McKinsey and

company

Books:

Principles of Marketing 15th

edition – Philip Kotler & Gary Armstrong

Supply chain management: Strategy, Planning and Operations 4th

Edition – Sunil Chopra,

Peter Meindl and D.V. Karla