The luxury jewellery and timepieces category is on course for a radical shake-up, as leading manufacturers of soft (fashion-driven) luxury goods diversify into hard luxury to capitalise on untapped opportunity. What are the implications and where will the key battlegrounds be drawn up?
Soft luxury specialists build new hard luxury positions
Strategic decisions to diversify into new business areas are never taken lightly in the luxury goods industry because they have historically confused consumers and diluted brand equity. Companies that specialise in exclusive handbag collections or designer apparel are not normally a good fit for luxury timepieces, for example.
But, tougher times often call for riskier decisions. So it is that some of the world's leading soft luxury specialists are in the process of rebalancing their traditional portfolio of products and making bold new forays into luxury jewellery and timepieces.
In July 2012 Louis Vuitton (LVMH), the world's biggest luxury goods company – renowned for its handbags and designer dresses – opened a 160 sq m dedicated jewellery boutique in Paris. Around the same time, the Versace fashion house launched its first couture version of fine luxury, following in the footsteps of fashion specialists Gucci, Salvatore Ferragamo, Hermes, Ralph Lauren, Chanel and Dior.
Versace is expected to announce plans for its own standalone fine luxury stores in the near future, while Louis Vuitton is certain to open new jewellery boutiques in the world's trendsetting capital cities over the next five years, including London, New York and Hong Kong.
These shifts into hard luxury mark the birth of a new breed of luxury goods companies, with an eye on penetration in all luxury goods categories and, increasingly, in all luxury goods price points. In the case of Louis Vuitton's jewellery stores, for example, items will range from affordable jewellery (priced from around US$800) to ultra high-end jewellery, such as necklaces and rings encrusted with rare diamonds (costing upwards of US$1 million).
Hard luxury to follow the segmentation model of soft luxury
The strategic rationale behind new positions in hard luxury is twofold. Firstly, although the luxury goods industry has shown a high degree of insulation from global economic turbulence over the past four years, the prospect of a protracted period of economic instability in Western Europe together with slowing growth in the BRICs are starting to weigh more heavily on purchasing patterns.
We are seeing strong growth in affordable soft luxury and a softening of growth in high-end soft luxury, for example. As a result, companies such as Mulberry, Burberry, Ralph Lauren and Michael Kors have each ramped up the participation of products positioned at accessible price points, and are increasingly dependent on this business arm to shore up their profitability. Similarly, diffusion brands are proving increasingly profitable for designer apparel, both in developed and emerging markets.
The picture is different in hard luxury where products positioned at top tier price points are continuing to show insulation. This is because hard luxury items, such as luxury timepieces and high-end jewellery, typically retain (or gain) value over time. They are, in effect, regarded as a safe haven for luxury goods consumers. Crucially, this shift into investment-protection purchasing at the top end of luxury goods will get more pronounced in Western Europe as the Eurozone debt-crisis deepens.
Secondly, hard luxury is attractive for soft luxury specialists because of its untapped market (and segmentation) potential. Specifically, the fine jewellery category is dominated globally by heritage brands, which are typically unbranded and made by independent (often family) businesses. By the same token, hard luxury has not segmented into different price tiers in the same way as soft luxury.
With the likes of Versace and Louis Vuitton rolling out hard luxury products at accessible, premium and ultra premium price points, the hard luxury market is set for a potentially radical shake-up. The upshot will be a much bigger footprint for trendsetting fashion brands. This will raise the competitive operating environment for more traditional heritage brands, and ought to boost the overall size of the hard luxury market.
Growth potential in developed and emerging markets alike
China, the world's biggest growth market for luxury goods, has a consumer base that is highly receptive to fashion branding. Indeed, whereas more traditional luxury goods consumers in Western Europe might be put off by fine jewellery that is manufactured by an apparel fashion house or a handbag maker, the new generation of luxury goods consumers in China and right across the emerging markets tend to be more brand focussed in their purchasing patterns. This has its roots in status consumption culture.
The luxury jewellery and fine timepieces category in China was valued at some US$4 billion and is forecast to show growth of around 17% a year to 2017, according to Euromonitor International. That is a hugely attractive revenue pot for new players, even if margins for hard luxury are typically narrower than in soft luxury categories. India is also forecast to show sharp growth in luxury jewellery and timepieces over the next five years, according to data from Euromonitor.
In addition to the potential upside of branded jewellery in emerging markets, fashion brands will hope to capitalise on growing demand for accessible luxury goods in developed markets. New lines of affordable luxury will be rolled out for middle class consumers, for whom heritage jewellery has largely been out of reach. These types of consumers are not luxury goods purists, and as such will not be sceptical of portfolio diversification between soft and hard luxury. Brand equity should not come under threat, therefore. Rather, the prestige association of fashion brands will be a spur to demand.
Portfolio diversification is the future
On paper, diversification outside the traditional comfort zone of a luxury brand is risky. But, the climate has never been better for building a more democratised hard luxury goods market. This is because affordable luxury is developing virtually as a standalone industry.
In luxury apparel and accessories, for example, affordable luxury has eaten into the middle ground of retailing, but has also captured trade down from the high end. As consumer purchasing power weakens in developed markets, there is clear evidence that middle-income consumers identify affordable luxury as either a long-term investment, or as a treat to sweeten tougher times.
There is a risk, perhaps, that the elitism and rarity of ultra premium jewellery might be diluted by stronger proliferation of accessible items. But, that is most likely to impact on smaller, independent players. For the industry's biggest manufacturers, portfolio diversification and price segmentation is the new strategic focus.