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How the 10 biggest luxury brands came to dominate the world

The successful business strategies of 10 internationally known luxury brands.

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A Vietnamese woman walks by the Louis Vuitton shop in the French quarter in Hanoi, Vietnam. (Paula Bronstein /Getty Images)

There is no more pure form of marketing than luxury brand marketing: This is an industry where customers' perceptions drive everything. One false step and the fall from shoppers' most-desired lists can be swift and brutal.

Luxury products—clothes, handbags, shoes, and jewelry—might be well made, but they're not difficult to make. The entirety of the business rests on keeping shoppers convinced that the brand name alone is worth paying extra for.

So, who is best at it?

Each year, market research company Millward Brown ranks the top 10 luxury brands globally, based on "brand value." The company's BrandZ model takes into account a brand's dollar earnings, its potential future earnings, and the quality of the brand in the mind of the consumer, to arrive at a final "brand value," expressed in dollars.

We've put that information together with a description of the marketing plan for each brand: Now you'll know why you wear the labels you wear.

10. Burberry. Brand value: $4 billion, up 21%

The Burberry tale is oft-told: Once upon a time it was a stuffy brand that made raincoats for Britain's upper classes. Then, in the 1990s, it reinvented itself with a full range of clothes, all trimmed in the Burberry plaid. The company saw £1.9 billion in revenues last year. The company has continued to expand its range, now offering a Burberry Body fragrance extension and the Burberry Prorsum high-end clothing collection.

The company also prides itself on its digital marketing. Its web site has a click-to-chat function and the stores carry iPads for customers who want to browse via screen.

One note of caution: Burberry said growth in China is slowing in its last financial update.

9. Moet & Chandon $4.2 billion, down 8%

Moet parent LVMH controls 1,697 hectares of the Champagne growing region in France, according to its annual report. Its champagne brands include Moet & Chandon, Dom Perignon, Veuve Cliquot and Krug, and together they form 18.3 percent of the global market. Good luck competing with Moet—the French regulatory agency that controls Champagne places annual caps on its production.

Thus LVMH is essentially grandfathered into the region, and competitors can't enter unless the company sells. It's a classic barriers-to-competition situation created by government regulation. (Prosecco and Cava are often just as good as champagne—but people want to celebrate special occasions with "the real thing.")

It is not surprising that €1.8 billion of LVMH's revenues come mostly from champagne.

8. Hennessy. Brand value: $4.6 billion, down 8%

The Hennessy story is all about the barriers to competition that can be erected after you've established a dominant market position—assuming you did that more than a century ago. Hennessy has been the top cognac brand since 1890 and now has a 41.1 percent share of the market. LVMH's cognac unit, part of its Diageo drinks division, booked €1.7 million in revenues last year. (Its brand value may be declining because its market share is also: Two years prior, Hennessy had a more than 50 percent share by bottles sold.)

Good luck finding an inroad into this market: Hennessy owns 177 hectares of the cognac growing region, and actually reduced that acreage in 1999 by 60 hectares in a scheme to pay farmers to grow other types of wine grapes, its annual report says.

7. Cartier. Brand value: $4.8 billion, down 9%

There are two distinctive jewelry boxes in the world: Tiffany's robin's egg blue one, and Cartier's red ones with gold trim. Cartier is the only general jeweler to make Millward Bown's list.

The company is owned by the Richemont group, which also owns Van Cleef & Arpels, among others. Its jewelry brands saw revenue of €4.5 billion last year, up from  €3.5 billion the year before. That massive run-up can be explained in a single word: China.

Here's how CEO Johann Rupert explains it, and we're quoting this verbatim from Richemont's most recent earnings call:

I am not going to say that this is sustainable. We have no idea what the currencies are going to do.

... So anybody who’s going to ask, ‘So, what do you think the next year looks like?’, why don’t you just not ask the question, because we’re not going to answer any? It’s not that we’re coy or funny. We don’t know. We also do not know what the currencies are going to do, and we also do not know whether the Chinese are going to continue to buy ad infinitum. We don’t know.

… I feel like I’m having a black tie dinner on top of a volcano. Okay? That volcano is China, but that’s what I feel like. I go, in the morning we put on our ties and our watches and we go, and the food’s better, and the wine’s better, and the weather is great, but let’s not kid ourselves. There is a volcano somewhere, whether it’s this year, in ten years’ time, or in twenty years’ time. We are exposed to China. I think they’re going to travel more. I think they’re going to survive. I think all of these things, but we are now a ‘China play’, and it suits us if the euro gets weaker.

6. Prada. Brand value: $5.8 billion, N/A

Prada's same-store sales were up 42 percent in Q1 2012, and the group booked €541.5 million in total revenues. A huge part of Prada's success comes from one thing: a massive expansion in the number of its stores. It opened 65 of them between April 2011 and April 2012.

Millward Brown says: "Following its IPO (Initial Public Offering) in June 2011 on the Hong Kong Stock Exchange, which raised over €206 million ($275 million), Prada planned to add about 80 stores annually over the next three years, including a total of 30 stores in China. Most of the openings will be Prada brand stores, reflecting a general trend among luxury brands to assert tighter brand control by shifting away from licensing and franchising. The brand currently operates more than 200 stores worldwide and also distributes through an extensive wholesale network."

5. Gucci. Brand value: $6.4 billion, down 14%

Luxury goods holding company PPR scared investors in the first quarter by noting that revenue growth at Gucci slowed in the fourth quarter of last year. "Slowed," however, is a relative term. In 2011, sales at Gucci were €3.2 billion, up 18 percent on the year prior. They were up by a similar proportion in Q1 2012, too. 56 percent of Gucci's sales come from leather goods.

Going forward, Gucci is rolling out an extravagant redesign of its major stores, featuring digital video displays.

Unlike the other luxury brands, which operate in an almost obsessive culture of secrecy about themselves (to maintain that elusive chic), PPR is rather more down-to-earth about how it intends to operate Gucci, which it acquired in 2004. It has centralized media buying for all its brands (including Puma and Volcom). And it is constantly fussing over its factory-to-store supply chain, which it completely owns or controls.

4. Chanel. Brand value: $6.7 billion, down 2%

In the 1970s, after the death of Coco Chanel, the brand rescued itself by cutting the list of distributors selling Chanel No. 5 from 18,000 to 12,000—and thus making it more difficult and more desirable to find.

Chanel—and its head designer Karl Lagerfeld—have worked hard to retain this air of exclusivity (it doesn't sell certain products online, for instance), and the company reportedly books about €1.8 billion in revenues annually. But it has actually extended its brands to become more mass-market again, for instance with the Coco Mademoiselle sub-brand for younger women.

Like a lot of luxury brands, Chanel has also opened new stores in Asia, and Lagerfeld pays special attention to Japan where Chanel has a store in the Ginza district.

3. Rolex. Brand value: $7.2 billion, up 36%

Rolex associates itself closely Equestrian sports, golf, motor sports, skiing, tennis, and yachting. All of those activities are favored by the super-rich, and indeed Rolex is the most popular watch among "pentamillionaires," or people with a net worth topping $5 million, according to the Luxury Institute. Rolex relies most on print ads and sponsorships of tennis players such as Roger Federer, Ana Ivanovic, Andy Roddick and Justine Henin, but it has also runs ads on ESPN during major tennis tournaments.

Since 2008, the privately held Rolex has succeeded despite itself. The brand got new leadership in 2008 when CEO Patrick Heiniger resigned for "personal reasons" after reports that he had lost $900 million of the company's money in Bernie Madoff's ponzi scheme. He was replaced by Bruno Meier, who has maintained the company's culture of secrecy. Then in 2011 Meier was replaced by Riccardo Marini, who was previously responsible for Rolex Italia. The brand's flagship London store was sold late last year for £12.5 million.

No one really knows whether the company is healthy or not.

2. Hermes. Brand value: $19.2 billion, up 61%

Chief Executive Patrick Thomas cautioned growth slowed when he delivered his Q1 2012 results, which included a 22 percent increase in sales to €777 million. Part of Hermes' management secret is keeping it in the family. In June 2013, Axel Dumas will become joint-CEO of Hermès International alongside Thomas—Dumas is a member of the sixth generation of the Hermès family and is currently the COO.

The company sees itself as a guardian of creativity and craftsmanship. But it's also financially disciplined—it sold its stake in Jean Paul Gaultier and expanded into housewares recently. The chain has only 328 stores worldwide.

The company's annual report is somewhat whimsical. It described last year's performance thus: "Hermes passed 2011 with the lightness of the horse who plays the obstacle."

1. Louis Vuitton. Brand value: $25.9 billion, up 7%

Louis Vuitton's strategy is to only associate itself with classic, iconic celebrities. Its new campaign will feature Muhammad Ali, for instance. The one just ended starred Angelina Jolie, sitting in a boat in Cambodia. Other stars who have endorsed the brand include Mikhail Baryshnikov with Annie Leibovitz; Pelé with Diego Maradona and Zinedine Zidane; and Ali Hewson with Bono. Yves Carcelle, Louis Vuitton's CEO, believes LV is the luxury brand that is most closely associated with travel.

The parent company, LVMH, did €8.7 billion in leather goods sales in 2011, up €7.5 billion from the year before. It has an operating margin of 35 percent, which has gotten bigger in recent years after a 1998 plan to expand its roster of leather suppliers—which no doubt had the effect of maintaining price competition among its vendors. LV also controls its distribution through a chain of 1,200 stores which it owns.

The real growth in this brand, however, comes from Asia, Japan and South America. Sales are actually stagnant in Europe and the U.S.

Original Source URL: 
http://www.businessinsider.com/how-the-10-biggest-luxury-brands-came-to-dominate-the-world-2012-6?op=1

http://www.globalpost.com/dispatch/news/business/120626/business-insider-luxury-brands-international-world