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    Luxury Is A New Game. These Are The New Rules

    The pandemic has reshuffled the luxury industry's deck. But brands that hope the game will return to "normal” are in for a rude awakening.
    The pandemic has reshuffled the luxury industry's deck. But brands that hope the game will return to "normal” are in for a rude awakening. Photo: Courtesy of Brunello Cucinelli
      Published   in Hard Luxury

    Key Takeaways:#

    With a handful of exceptions, most luxury brands lost money in 2020, with drastic declines in their core regions (Europe and North America). But these troubles were due to more than just lockdowns.

    The unprecedented magnitude of China's rapid growth in 2020 was a one-time effect. China will still be the top growth driver of the luxury industry in this decade but don’t expect 2020 growth rates to continue.

    Generation Z (consumers up to 25 years of age) has become the most influential consumer group and will dethrone millennials as the number one customer group for luxury by 2030.

    Through a series of webinars, I recently had the chance to share my view on the luxury market in a candid discussion with over 200 luxury brand leaders from around the world. The series was thought-provoking, eye-opening, and even shocking to some participants, initiating deeper reflection on the need for radical change.

    My conviction is that luxury brands must be brutally honest about the magnitude of change occurring in the luxury industry. We are not just living in times of disruption and rapid change; we are witnessing the most fundamental change in the recorded history of luxury.

    The pandemic disruption has already rattled the luxury industry to its core. With a handful of exceptions, most luxury brands lost money in 2020, with drastic declines in their core regions (Europe and North America). But to assume that this was just a result of closed stores during lockdowns underestimates the deeper shifts happening.

    Meanwhile, China's rapid growth during 2020 was, in its unprecedented magnitude, a one-time effect. These gains were mostly driven by travel restrictions, forcing Chinese customers to purchase their luxury goods in Mainland China rather than Paris, Milan, Florence, or New York. It also meant they redirected their budgets — normally reserved for overseas trips — towards purchases of jewelry, handbags, fashion items, cars, and more. Once travel is possible again (some predict by mid or late-2021), many of these one-off effects will vanish. While I predict China will still be the clear growth driver of the luxury industry in this decade, we can’t expect growth rates like those in 2020.

    In other words, the pandemic reshuffled the cards, led to brutal short-term spending shifts across regions/categories, and impacted consumer sentiment, behaviors, and expectations. However, brands hoping things will get back to “normal” after the pandemic will receive a rude awakening.

    The game of luxury is changing at an unprecedented rate, and – importantly – the speed of that change is accelerating. Generation Z (consumers up to 25 years of age) has become the most influential consumer group. They already contribute 5-to-15 percent of luxury sales (depending on the country), and by 2030, they will dethrone millennials as the number one customer group for luxury.

    Today, they are already influencing the purchase behaviors of millennials, who, in turn, had been the trendsetters for Gen Xers and above them. Generation Zers are, without a doubt, the smartest luxury consumers ever. They scrutinize every purchase, they do their (digital) homework, and they know more about luxury categories and brands than any generation before them. They are the most difficult to convince and are the most value-driven.

    Because Gen Z has spent more time on social networks and digital platforms than any previous generation, they value interpersonal experiences even more and expect them to count. Brands that do not provide superior experiences — either online or off — are simply not relevant to them. And don’t expect them to suddenly like your brand as they mature because preferences are firmly formed in one’s early years.

    Their attention spans are shorter than any generation before them — not because they are dumb, as their haters believe. In fact, it is the opposite: They are unbelievably smart and have learned to process information and data more efficiently than any previous generation. With so many choices available to them, they refuse to waste time. Gen Zers see themselves as brands, so, consequently, luxury brands must match their values.

    These attributes have changed the luxury game in the most profound way imaginable, as 95 percent of purchase preferences today are now decided during the digital journey. That means luxury brands either win or lose across the many digital touchpoints customers see — long before they even enter a physical or digital “store.” But to win this digital game requires a competitive digital advantage, which requires sophisticated digital infrastructures that allow brands to measure consumer sentiment and competitive dynamics in real-time.

    When I asked my webinar audience if they could tell me how their brand's perception had shifted over the past week or month versus their competitors, no one raised their hand. To me, that was a red flag that most brands — from market leaders to small brands — are not equipped with the right tools or insights to achieve digital competitive advantages.

    And yet, this fault can be deadly if not addressed immediately. The new game requires digital leadership, not just the digital transformations all companies must suffer. Brands also need to know how consumer sentiments are shifting because they will underestimate the competitive activities aimed at their customer base. I have seen brands lose 20-40 percent of their customers within two-to-four years because they did not understand the magnitude of their competition and digital change.

    But to truly reach younger customers, brand storytelling must also drastically improve. Luxury brand storytelling is a massive weakness for many brands. They still focus too much on item features while neglecting to clarify their brand equity aspirations. Many of them got away with this position when communicating to Gen X but aren't going to with Gen Z. For them to reach the most sophisticated and discerning customers, brands must be authentic and convey relevant content and messages, which requires real-time customer insights. Otherwise, brands will dump millions of dollars into advertising that will never break through — all while their brand equities and sales drop.

    The new game of luxury will be rewarding for brands that do their homework. Brands with proper brand positioning, real-time insights, and an understanding of sentiment shifts that allows them to create exceptional luxury experiences will win. But most importantly, they have to be authentic to connect with their customers better than their competitors, especially emerging ones. Over the next five years, as Gen Z takes over, we will see many established brands lose their relevance. New brands are ready to launch and have much deeper insights into younger customers and local cultures. They also have the digital savviness that many established brands lack.

    Today, most brand experiences are not creating extreme value, and very few can consistently create magic or desire. While luxury brands always talk about the luxury experience, they rarely deliver it. And when dealing with Gen Z, the most experience-seeking generation, that is deadly.

    No brand, no matter how big, is safe. Only the ability to reinvent their value creation models will save them. Brands cannot just stay relevant; they must gain a competitive advantage.

    Daniel Langer is CEO of the luxury, lifestyle and consumer brand strategy firm Équité, and the professor of luxury strategy and extreme value creation at Pepperdine University in Malibu, California. He consults some of the leading luxury brands in the world, is the author of several luxury management books, a global keynote speaker, and holds luxury masterclasses in Europe, the USA, and Asia. Follow @drlanger

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