Testing the fabric of luxury brands

The luxury goods sector has weathered recent storms well, and some brands are considering IPOs. However, a combination of cheap fakes and investor pressure could erode their biggest asset – exclusivity.

The padded nylon Prada, the quilted Chanel, the Fendi baguette, the Ferrari and the ubiquitous Burberry check seem set to stay on the aspirational wishlists of consumers worldwide.

The storm clouds that gathered over the luxury goods market following the attacks on the US and the economic downturn seem to be clearing away, with analysts predicting that the sector is on the verge of re-establishing the massive growth that it experienced in the late Nineties.

On the back of this recovery, both Prada and Burberry are planning an initial public offering (IPO) by the end of the summer. Fiat-owned Ferrari also plans an IPO later this year.

According to Euromonitor, the value of the global luxury goods market will fall by just under two per cent this year, but will see an increase of 7.3 per cent between 2002 and 2005.

Analysts are also positive about sales coming out of tourism. Mintel senior European retail analyst Bryan Roberts says: “The tourism element of luxury retail is very resilient, having grown every year for the past 50 years despite conflicts and world events.” He adds that, while consumers in Asia and Europe may be less inclined to travel since September 11, there are no signs that they will stop buying luxury brands at home.

Williams de Broe analyst Ian Macdougall says: “Luxury brands have a large part to play in the buoyancy of the retail sector. Selfridges has recently reported booming sales because of the increase in luxury brand sales. I do not think that consumers will ever let go of their aspirations to own a Gucci or a Ferrari.”

But the strength of certain brands is being tested, as the market is flooded with cheap copies. Burberry checked-scarves and Louis Vuitton graffiti bags have appeared en masse on market stalls.

Burberry’s trademark check reached mass-market consciousness two years ago, thanks to a fashion shoot featuring a semi-naked Kate Moss under a Burberry raincoat. Now it has become so commonplace that some analysts are questioning whether the brand fits into the luxury goods market anymore.

One city analyst says: “Burberry is a one-thought company whichever way you look at it. This is why it has been so easy to produce copies and thus the reason for the deterioration of brand equity.”

The company, however, insists that the availability of cheap imitations is an industry-wide issue and is not hitting one single company in particular. A spokeswoman says: “Burberry is trying hard to combat the cheap copies. The actual check is now available only on 25 per cent of all Burberry products, and the company is diversifying into other areas such as leather,”

But diversification is another risk area for luxury brands, since premium brand extensions tend to trickle down the market, making the brand less aspirational for consumers. Chris Pearce, a managing partner at creative agency B’lowfish, says: “Pierre Cardin has no aspirational value because of its ubiquity. It stretched itself so far and into so many areas that it almost became a badging exercise.”

The Pierre Cardin name has been applied to everything from umbrellas to keyrings.

The industry fears that the flotation of luxury goods brands could have the same effect. One City analyst points to the fact that there are not many quoted luxury brands and most luxury brands are still part of family-owned businesses. He says they maintain their aspirational value by being tightly controlled.

He adds that it will be interesting to watch the growth and positioning of luxury brands when they come under pressure from shareholders to deliver results every quarter. Listed companies in the sector at present include Giorgio Armani; Pinault-Printemps-Redoute (PPR), which owns Gucci; and the LVMH group, which owns the Christian Dior, Dom Perignon and Moët & Chandon brands.

Datamonitor lead consultant Karl Hicks agrees that a listing causes conflict. Hicks adds: “A flotation for the likes of Ferrari and Prada will always be something of a risk – on the one hand, it will raise the profile of the brand and the company; but on the other, it might see increased pressures on the brand from the City.”

At an analysts’ meeting last week, Fiat chief executive Luca di Montezemolo hinted that the Ferrari brand would become a little more stretched but that the company would still keep control of its prized possession. He said: “The Ferrari name has huge potential but it has to be used in the proper way.”

Other car companies have mooted similar ideas to float off their lucrative luxury marques to release value as their mass-market brands struggled to make money. When Ford first set up the Premier Automotive Group (PAG) division to house its luxury brands, including Aston Martin and Jaguar, it was rumoured to be planning an eventual flotation of the company. Although this has not happened yet, the company began publishing separate accounting figures for PAG this year.

IPO expert John Rubinstein sees flotation as part of a business strategy to fund new product development and ranges. A partner at solicitors Manches, Rubinstein says: “A flotation of a company essentially means change of ownership, but board members and shareholders will always have the obligation to protect the brand.” He adds that the Prada and Burberry flotations will boost business confidence, though it could mean a “test for the brand equity”.

Branding consultants believe the key issue for luxury goods is the management of brands. Brandhouse WTS chairman Mark Wickens says that, in order to remain desirable, aspirational brands need to be about indulgence, nostalgia and status.

Kate Moss is the face for both Burberry and mass-market cosmetics brand Rimmel but it’s the image of the half-naked, not the lip-glossed, model that consumers buy into to satisfy their dreams of affluence and indulgence – as long as Burberry maintains its air of glamour.

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