Impact of the Recession: Luxury Handbags

Luxury Goods Market

Luxury goods companies sell branded items that are usually divided into four main product categories, each accounting for 20-25% of the total market. In the past the shopping experience was part of the elitist and exclusive image companies portrayed. Recently, there has been an increased focus on customer service and speedier delivery of goods that were unavailable in the store.

Internet has played an increasingly important role in luxury goods distribution. Both luxury companies and retailers have made considerable investments in their websites. They face additional competition from online businesses such as Net a Porter, which provides customers with a convenient and discreet way to purchase their luxury goods. In addition, these customers often offer a broader assortment of products and thereby act as a "one-stop-shop".

In 2008 the size of the luxury market totaled €170B. Exhibit 1 shows the geographical distribution of the revenue. The majority of sales are still coming from established markets, such as Europe and the Americas, where most luxury brands originate. Developed markets have higher average incomes and have had access and exposure to luxury brands for a longer period of time.

Traditionally, luxury companies have dictated what their consumer should aspire to. They set the standard for what "status symbols" and "elitist differentiation" looked like. However, since the 1980s, the luxury consumer base has become broader and more complex, forcing luxury companies to reconsider their market planning strategies. The focus on exclusivity and intrinsic value of the 1980s gave way to brand proliferation and increased availability (due in part to a lower average ticket price) in the 1990s, which then transitioned into to diversification of product offerings in the 2000s. A customer base with constantly evolving aspirations has gradually pushed luxury goods companies more designer driven to a more customer-focused approach.

Focus: Luxury Handbag Market

The growth in the handbags market over the past five years was fuelled in part by the "It Bag" craze among the growing segment of affluent women. This trend was supported by rapid style innovations by companies such as Mulberry, Bottega Veneta, and Burberry, who saw strong growth in their premium handbag and accessories sales. In 2006, 25% of Louis Vuitton's sales came from new styles. However, in 2007 the growth for premium handbags has slowed down to 4.8%, as consumers have become less willing to spend thousands on the latest trend.

As most other luxury goods, designer handbags are affected by the availability of knock-offs. According to a Mintel study, 10% of its respondents reported having purchased a knock-off from a street vendor; another 9% stated that they usually buy handbags that look like designer bags. In addition to the increased availability of counterfeit items, their quality has gone up too. As a result, 42% of Mintel's respondents aged 18-24 admitted that they cannot tell a fake designer purse from a real one. Overall, 31% of all market segments cannot spot the difference.

Aside from being hard to spot, fakes have become more socially acceptable. In a report by Davenport Lyons, 44% of counterfeit handbag buyers have admitted the fact to their friends and family. This a dangerous trend that is forcing luxury companies to adjust their product development strategies. Some companies have chosen to launch new styles of handbags that use luxurious materials and complex designs that are difficult to imitate. However, these new "bling" products , often outrageous and impractical, are only short-term trends that do not have the longevity of more traditional offerings.

Luxury Handbag Market Segmentation

The premium handbag market can be divided into three categories:

* Absolute: This segment's brands appeal to consumers for whom money is not a consideration and who appreciate brand history, reputation, and a product's intrinsic value.

* Aspirational: Brands competing in this segment are still viewed as prestigious, but appeal to customers with slightly lower income. They often include broader and faster-changing product lines.

* Accessible: Brands in this part of the market appeal to consumers in middle and upper middle class, who strive for luxury goods as symbols of differentiation and status, but have budget restrictions. They are also the most susceptible to the purchase of counterfeit items.

According to Luca Solca of Bernstein Research, 60% of the luxury market is now based on demand from aspirational customers rather than from the wealthy elite. These customers can shop in the first two price segments, but can rarely afford the $3,000+ price tag. Brands in this segment still portray elitism and exclusivity, but have a slightly more affordable image than those in the absolute segment.

Exhibit 2: Market Opportunity Map for Luxury Handbags

Price Absolute Aspirational Accessible

High ($3000+)

Mid ($500-3000)

Entry Level (<$500)

Over the course of the industry's history, there has been little mobility and repositioning activity in the market. Moving up (i.e. from aspirational to absolute) is considerably more difficult than moving down. New entrants may find it near impossible to attract the absolute segment; barriers to entry into this market are significant. Absolute brands succeed not on volume, but on margin, by effectively translating the quality and brand into significantly higher price tags that can only be afforded by a small percentage of the population. Companies that compete in the aspirational segment offer a slightly broader range of products to help them achieve high volume sales, while still maintaining their brand image through unique offerings. For example, Louis Vuitton offers both the "Pochette" purse, which retails for approximately $400 and a limited edition (only 24 were produced) "Tribute Patchwork" bag which retailed for approximately $50,000 (See Exhibit 5). The company's ability to be successful across markets is based on the perceived quality of its products and complementary offerings, such as exclusive