#60 The Luxury Business: Part I
#60 The Luxury Business: Part I
Won't get fooled again: premium is not luxury
Luxury is all about elevation. It's an entirely different ballgame with its own set of rules. Far too often, the label "luxury" is misapplied, diluting its essence and misleading both consumers and investors. Owning a luxury brand doesn't automatically guarantee superior performance or higher quality. In fact, strategies that can drive success in the mainstream or premium sectors might spell doom for a luxury brand. Therefore, it's critical to recognize that while luxury and premium models both strive for excellence, their approaches are not interchangeable. Success in the luxury space requires a keen understanding of its unique mechanics—strategies that may yield profitability in a conventional business setting could be disastrous in a luxury context.
Over the next weeks, we intend to cover the fundamentals of the luxury industry. Today, we'll dissect what sets apart premium and luxury brands, even when both offer high-quality or highly desirable products. In our second installment, we'll explore the core rules and strategies that govern the luxury market. The third part will delve into the unique business model inherent to luxury brands. Finally, our series will culminate with a detailed look into the business history of the luxury watchmaking industry. So, stay tuned as we unravel the complex tapestry that makes luxury more than just a label—it's an entirely different sphere of business.
Welcome to Edelweiss Capital Research! If you are new here, join us to receive investment analyses, economic pills, and investing frameworks by subscribing below:
Section 1: Common Misconceptions
The Luxury Fallacy
One of the most prevalent misconceptions is that luxury is inherently "better" than premium. In reality, the word "better" is misleading; what we're dealing with is a difference in attributes, emotions, and social signals rather than a straightforward issue of quality.
Take, for example, the world of wristwatches. Rolex, with its hand-assembled timepieces, is often held up as the epitome of luxury. Each Rolex watch is a complex machine that often takes a year to assemble. On the other hand, we have brands like Omega, which are also prestigious but are more often categorized as premium. Omega watches are exceptional in quality and precision but are generally more accessible and lack the same sense of exclusivity that Rolex commands.
In terms of functionality, an Omega watch tells the time as accurately as a Rolex. Both are made from high-quality materials and demonstrate excellent craftsmanship. But Rolex, through careful brand building, has created an aura of absolute exclusivity and prestige. It's not that Rolex is "better" than Omega; rather, the former provides a different set of emotional and societal rewards.
Luxury Necessitates High Quality, But With a Twist
Another misconception is that luxury always means high-quality products. While it's true that many luxury items are well-crafted, what really sets them apart is their scarcity, brand story, and the emotion they evoke.
Let’s pour ourselves a glass of fine wine. Brands like Château Margaux or Domaine de la Romanée-Conti are not just about the taste; they offer an experience that extends far beyond the palate. Every bottle comes with a story, deeply rooted in a specific terroir, enriched by generations of wine-making tradition. The scarcity of these wines, coupled with their storied history and the intricate process of crafting each bottle, places them in the realm of luxury.
Contrast this with a premium coffee brand like Blue Bottle, known for sourcing the highest quality coffee beans and maintaining rigorous quality control to produce exceptional coffee. Blue Bottle focuses on the freshness of their coffee, direct trade sourcing, and educational initiatives for consumers. However, the brand is designed to be accessible to anyone who appreciates quality coffee; it doesn't encapsulate the same level of exclusivity or storied history as a vintage bottle of Château Margaux.
Both products—fine wine and high-quality coffee—excel in quality, offering some of the best experiences in their respective categories. But what sets a vintage Château Margaux apart is the tapestry of intangible elements woven around it—exclusivity, a rich narrative, and a deep emotional connection that transcends the product itself.
The takeaway here is that while both luxury and premium categories necessitate high quality, luxury brands infuse their offerings with a unique blend of narrative, emotional engagement, and exclusivity. Premium brands like Blue Bottle excel in quality and functional benefits, but they typically do not venture into the realm of societal status or deep-rooted emotional connection to the same extent as luxury brands.
The Price Confusion
A high price tag is often mistaken for a guarantee of luxury, but this is a common fallacy. Just because something is expensive doesn't automatically make it a luxury item.
In the automotive industry, for example, let's compare Tesla with Bentley. Tesla's electric cars can be as expensive as some of Bentley’s lower-end models. However, while Tesla focuses on innovation and technology, Bentley leans into craftsmanship, heritage, and a bespoke experience. Tesla is undoubtedly premium, appealing to a consumer segment interested in cutting-edge technology and sustainability. Bentley, meanwhile, is undeniably a luxury brand, attracting those who value tradition, hand-crafted details, and the feeling of owning something truly unique.
So, it's essential to look beyond the price tag when discerning between luxury and premium. Both categories offer products that can be expensive, but for different reasons and with distinct emotional and social impacts. Luxury is not a synonym for high-cost, just as premium is not a byword for affordability. Each plays a unique role, fulfills different desires, and appeals to disparate psychological and social needs.
Section 2: What Makes a Product Truly Luxurious?
Social Stratification
Luxury items serve as more than just products; they are markers in a social landscape, signifying the status, wealth, or unique taste of their owners. Owning a luxury item often places you in a particular social stratum, which is, in part, why these items are so highly coveted.
Tiffany & Co. stands as a luxury brand, even though we will see in the future that it is not necessarily as such. It’s not just about the high-quality silver, gold, and precious stones they use; it's also about the storied history and the iconic robin's-egg blue box that has become a cultural symbol. When you receive a Tiffany engagement ring, for instance, it is far more than just a piece of jewelry—it becomes a marker of a certain kind of exclusivity and elite social status.
Blue Nile, meanwhile, represents a premium approach. Though it also sells high-quality diamonds and fine jewelry, it does so with a focus on offering customizable options and more transparent pricing. They aim to democratize the fine jewelry market by making it accessible to a wider range of people, but in doing so, the social stratification element becomes diluted. While a Blue Nile ring can be just as beautiful as one from Tiffany & Co., it lacks the aura of exclusivity and heritage that elevates a luxury brand to its status symbol.
Emotional Connection
A significant component of luxury is the emotional connection between the brand and the consumer. This emotional bond is usually nurtured over time and is cultivated through experiences and narratives that the brand shares.
While there's no denying that some consumers seek luxury purely for its symbolic value, this clientele alone can't sustain a luxury brand in the long run. These are the fickle consumers who hop from one status symbol to another, today sipping Dom Pérignon and tomorrow moving on to the next big thing.
However, a luxury brand's enduring strength doesn't lie in catering to these surface-level enthusiasts. Instead, it's rooted in a core group of dedicated clients who resonate deeply with the brand's culture, philosophy, and unique identity. In other words, while status-seekers may make up a noticeable portion of a luxury brand's customer base, they're not its backbone. A luxury brand thrives on a substantial core of loyal customers who genuinely appreciate what the brand stands for.
For example, owning a Birkin bag isn't just about having a high-quality leather bag; it's about the story, the experience, and the emotions attached to it. The Birkin has an aura that goes beyond its physical form—it's not merely a bag but a work of art, a symbol of elegance, and a treasure that can be passed down through generations. On the other hand, a premium brand like Coach or Michael Kors also offers high-quality, fashionable handbags, but without the emotional aura or societal cache that comes with a Birkin.
Cultural Roots
A true luxury brand is often deeply rooted in a specific culture, contributing to its aura and allure. These cultural connections can stem from the brand's place of origin, the traditional techniques used in its craftsmanship, or the stories that are woven into its history. The product comes along with a small fragment of its native soil.
Take, for instance, Swiss watches. Brands like Patek Philippe or Audemars Piguet are deeply rooted in Swiss watchmaking tradition. The very notion of a Swiss watch evokes ideas of precision, craftsmanship, and a rich history—making it more than just a timekeeping device. Compare this with a premium watch brand like Citizen, which, while still offering excellent craftsmanship and reliability, doesn't carry the same cultural weight.
Authenticity and Location
The geographic origin of a product can significantly influence its luxury status, often enhancing its desirability and the emotional connection it forms with consumers. And here lies a fundamental divergence between luxury and premium products: the latitude they have concerning manufacturing location. Premium brands can optimize for cost-effective production locales, provided they maintain their standard of quality and service.
In contrast, luxury items are not just products but ambassadors of a specific cultural essence. They must be crafted in a locale that resonates with their brand's heritage. Think about Chanel or Hermès—both quintessentially French brands. The "Made in France" tag is an integral part of their luxury appeal. In contrast, brands like Dior or Burberry, which may outsource manufacturing to countries with lower labor costs, risk diluting their luxury status. Such a move could indicate that they may not possess the level of quality or creativity needed to command prices that would enable production in their home countries.
Upper-premium brands remain comparative, whereas luxury is superlative.
Premium car brands often compete on attributes that can be quantified and compared, such as horsepower, passenger space, or fuel efficiency. Take for example a brand like Lexus. When it first entered the market, it used comparative advertising to showcase its superior features in areas such as safety, comfort, and sustainability. The high price tag of a Lexus is thus rationalized by its extensive list of high-quality features and specifications.
In contrast, Ferrari superlative. With a Ferrari, you're not just paying for enhanced features or improved utility—you're buying into an experience and a legacy that transcends the ordinary. The car's blistering speed, its unparalleled craftsmanship, and its sheer aesthetic appeal don't just offer better 'value'; they define an entirely different category of existence on the road. Add to that the Italian character and heritage that come ingrained with every Ferrari, and it becomes clear that you're not merely purchasing a car. You're investing in an emblem of supreme engineering, heritage, and emotive power. Here, the price isn't just a number; it's a testament to a brand's ability to elevate itself above the rest, residing in a league of its own.
Luxury and premium products are complex tapestries woven from various threads—price, quality, emotion, culture, and more. Understanding these facets not only enriches our experience as consumers but also helps us make more informed decisions. Yet, this is only the tip of the iceberg. In a couple of weeks, we'll explore the strategies that luxury brands employ to maintain their aura of exclusivity and the unwritten rules that they follow to enchant consumers generation after generation. So, if you've ever been fascinated by the mystique of brands like Hermès, Rolls Royce, or Patek Philippe, you won't want to miss it.
If you enjoyed this piece, please give it a like and share!
Thanks for reading Edelweiss Capital Research! Subscribe for free to receive new posts and support our work.
If you want to stay in touch with more frequent economic/investing-related content, give us a follow on Twitter @Edelweiss_Cap. We are happy to receive suggestions on how we can improve our work.
References & bibliography
Kapferer, J.N., Bastien, V. (2009). The Luxury Strategy: Break the rules of marketing to build luxury brands.
Pierre-Yves, D., Fujioka, R. (2017). Global Luxury: Organizational Change and Emerging Markets since the 1970s
Pierre-Yves, D. (2014). A Business History of the Swatch Group: The Rebirth of Swiss Watchmaking and the Globalization of the Luxury Industry
Rambourg, E. (2020). Future Luxe: What's Ahead for the Business of Luxury
Sky Documentaries. (2022). Kingdom of Dreams.