Why 2021 may be the most important year for luxury brands: Interview with Daniel Langer of Équité on the future of luxury
Daniel Langer, CEO of Équité
2021 is going to be a critical year for the luxury industry. After the Covid pandemic has devastated many luxury brands in 2020, all hopes are on a recovery starting in 2021. We asked Daniel Langer, CEO of Équité and the Professor of Luxury Strategy at Pepperdine University in Malibu, California, who was just named “Key Opinion Leader to Watch in Luxury” by Netbase Quid, about key priorities for the luxury industry.
Q: How do you see the future of luxury?
Langer: I am an optimist and believe that the luxury sector will return to strong and steady growth. However, I don’t base my optimism on hopes and gut feeling, but on analyzing the past performance of the sector and looking into the research status quo. During the 25 years prior to the pandemic, the luxury sector outperformed the global GDP by a factor of 2x based on data by Bain & Company, even if we take the hit in 2009 after the last crisis into consideration. The luxury sector also rebounded much faster from the last crisis than low-end retail according to data by JP Morgan. Additionally, my research has shown that luxury is more recession-proof than non-luxury sectors due to the psychological reasons consumers buy a luxury item or indulge in luxury services.
Q: Then why was the sector hit so hard during the pandemic?
Langer: There are several reasons. This crisis has been different from the previous ones as it is not just a demand crisis, but also a supply crisis. When stores are closed or operate under a restricted and interrupted schedule, then consumers can simply not buy. Especially the luxury car and luxury jewelry sector have been hit hard by this. Many brands in these sectors have been relying - sometimes exclusively - on a person to person sales approach in brick and mortar stores. When stores have to close, this business model simply collapses. Travel retail took a dramatic hit with passenger traffic reduced by 90% or more at major airports. Hospitality is suffering from a combination of consumer fears of travel, disrupted travel routes, and uncertainty of ever-changing regulations. Even if someone may want to travel today, they often won’t because they may be stranded somewhere far away from home.
Q: When will the luxury sector bounce back?
Langer: We already experience a strong rebound in China and parts of Asia. This has two causes. Improving consumer sentiment as the virus has been better contained in key Asian markets than in many western regions. And repatriation in China: as consumers can’t travel abroad, many are purchasing luxury goods inside China, leading to historical growth rates in the last two quarters
Q: Will all luxury brands profit from the rebound?
Langer: Unfortunately not. Many brands will disappear. I estimated some months ago that up to 50% of luxury brands may not survive. A market upturn does not automatically mean that consumers will buy all brands. The opposite will happen: once markets reopen, travel resumes, and life feels “normal” again, consumers will want to buy brands that create desire. Hence, now is the time for brands to prepare for this moment, to strengthen the positioning and the offering to make sure that they are future-ready when consumers come back. Sadly, we have seen that many brands did dramatic mistakes during the pandemic. They overreacted, cut prices, indulged in unprecedented promotions. This destroys brand equity and will hamper future success. And many brands have the wrong China strategy.
Q: Why are promotions so dangerous for luxury brands
Langer: During a promotion, you punish the loyal customers and reward those, who typically don’t buy you. This is never a good idea. In luxury, this strategy is deadly. I sometimes say that price promotion is the most secure way to ensure that your brand will decline. It is a tactic that should be banned from the arsenal of luxury strategies because it creates a dramatic erosion in consumer trust. It’s very simple: if I support a brand by buying an item early in the season at full price as a loyal customer, and then see that it is 50-60% off later in the year, I will not react overly happy. In fact, our research shows that it may destroy the trust in the brand forever. Years of loyalty can be gone in one promotion.
Q: What should brands do instead?
Langer: Luxury is about creating desire. Managers of luxury brands should never forget that. It is a truly holistic approach where each aspect of the brand needs to be optimized and managed to create a distinct experience that consumers crave for. This starts with a strong foundation in terms of brand storytelling and needs to include each and every touchpoint between the brand and its customers. In our brand and experience audits, we find shortcomings in both areas in more than 90% of cases. This means that the likelihood that brand experiences - even at the highest level of luxury - are not optimal is extremely high. Brands need to conduct regular brand audits, challenge their strategies, and ensure that they are ready today for the challenges and changes ahead. Just recently we audited leading luxury fashion brands and luxury car brands. The experience part was a disaster.
Q: What is the best practice?
Langer: The approach I love is to conduct a future of luxury master class with the leadership teams of luxury brands where we are briefed on what keeps them up at night. We then fast-forward five to ten years into the future into a reality where Gen Z becomes the leading consumer group. Together with the brand leaders, we discuss what are the implications, rigorously identify gaps and opportunities, and isolate best practices. This approach has been extremely insightful and successful. It allows brands to focus on future-readiness while addressing the most common issues they have today.
Q: What shortcomings do you observe?
Langer: Most brands are not prepared for the digital game that is already on now. I still hear too many CEOs and CMOs talking about digital transformation, while we are already in a fully digital reality. If you look to China, then this digital reality is even 2-5 years ahead of the rest of the world. Just having a nice website, a T-Mall presence, and social media marketing is not enough. In a moment where more than 95% of purchase decisions across luxury categories are initiated through the digital journey, digital competitive advantage needs to be the core focus for any luxury brand. It is imperative to think holistically about winning in digital and not just playing the game.
Q: What are the critical building blocks?
Langer: Gen Z is the most critical generation for your brand’s future success. And the future starts now. If a Gen Zer is not intrigued by what you do, Millennials won’t buy you (and they are the number 1 luxury cohort right now). If Millennials don’t buy you, then also the older generations won’t be interested in your brand. It is like a chain: if one link breaks, your brand becomes obsolete, since each generation looks to those who come after for inspiration. Hence, brands have to be relevant to Gen Z to succeed. This means much more focused and meaningful brand storytelling is needed since this generation is looking for purpose and meaning in brands. Those who still do outdated brand storytelling - the majority of brands do - won’t connect with the new generation. Within the next ten years, Gen Z will dominate luxury spending. The time to think differently is now. Brands also need to invest more efforts in training their staff on luxury, this is a major attention area and weakness across categories. To win the digital game, a much wider deployment of artificial intelligence-based brand insight tools is needed to generate real-time information of sentiment changes. I am still amazed how few brands know how they perform relative to their top competitors in the digital space. Not being able to understand nuances in sentiment shifts creates a structural competitive disadvantage.
Q: What is your one recommendation for brands in 2021
Langer: 2021 will initiate a growth trajectory for brands that do their homework. Don’t waste the opportunity! I will never forget a meeting with a luxury gourmet brand end of 2019 in Switzerland. I recommended them a drastic change in brand strategy including a complete overhaul of their storytelling and digital experience creation. The CEO told me that he does not think it’s urgent, since they were fine for 50 years. The brand is now bankrupt. This is how disruptive the change is. Brands have no time to waste. The best protection to be future-relevant is to question everything you do, try to anticipate how consumer expectations will change and how your competitive landscape will evolve (don’t forget those who are not yet launched!), and then create a rigorous action plan with clear timelines and responsibilities. 2021 is a call to action for all brands to prepare for the future.
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