Why luxury brands need to rethink their strategy radically: Interview with Daniel Langer of Équité on making brands future ready

Many luxury brands are about to miss the requirements of the future. 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 why brands need to radically rethink their strategy now.

Q: Why is is critical right now to rethink luxury brand strategies?

Langer: We are living in times of massive disruption. Focusing only on the effects of the pandemic and hoping everything will go back to “normal” soon would be myopic. The impact of the pandemic is brutal for many brands, but the changes that are happening beyond that will be even more drastic. Most brands are barely prepared for that.

Q: How did the pandemic impact luxury brands?

Langer: The last few months led to an unprecedented decline of the luxury market in Europe and North America. Some brands reported staggering losses, in some cases 75% or more (!). At the same time the Chinese luxury market grew by approximately 50% during 2020, further shifting the dynamic towards China. Sadly, very few brands have the right strategies in place for China, hence they don’t perform to their potential. Even worse, they burn enormous amounts of cash in China as very few brands are able to operate profitably in this important region.

Q: A growth of 50% in China sounds more than promising as the country enters the Year of the Ox. Why does the market still pose a challenge for most brands?

Langer: First of all, the rules of the game in China are dramatically different from the rest of the world. Luxury consumers are 15-20 years younger in average than in the rest of the world, they are more digital in all aspects, they interact with brands on local platforms like WeChat or Weibo, and the emergence of new social media platforms is faster than in any other country. Live-streamed social selling via key opinion leaders and more recently via key opinion consumers is unique and resembles more a QVC TV hard-selling experience than “traditional” luxury shopping. This puts brand equity at risk. Additionally, no other country has seen such a fast and radical emergence of sustainability demands from young consumers. Operating in this completely different market environment requires a humble approach, that puts the needs and habits of local customers first. It is dramatically different than selling luxury to Western customers. Many brands are struggling with this parallel reality.

Q: What is a key weakness of brands that operate in China?

Langer: On a fundamental level, it is lack of brand storytelling. Most brands think that they have a strong brand story which is clear, differentiated, and engaging, however when we audit brands, their storytelling tends to extremely weak. The best brands in the world score strongly on four to five dimensions on our six dimensional Équité luxury brand equity model. However, less than 5% of analyzed brands go that far. More than 80% of brands are only clear on one of the six dimensions. This is deadly in a digital world, where it is much more challenging to communicate the difference between brands. As a result, most luxury brands across categories feel very much the same, they do practically the same things, communicate on the same items, and they fundamentally lack emotion. Without radical change they will not survive this decade. By the way, the weakness in brand equity and brand storytelling is haunting brands also outside of China. There is no time for complacency.

Q: This is a strong statements. Many brands did well over the past decades without changing too much. Why would they not survive until 2030?

Langer: What many brands underestimate is the speed and magnitude of change. A great example is the category of luxury backpacks. This was a category that seemed to be the opposite of luxury. Few years ago, major retailers rejected the first brands that introduced luxury backpacks. The purchasing and category managers of major luxury retailers could not imagine that any consumer would buy them. Yet, perceptions changed in no time and luxury backpacks became a major source of revenue for many of the leather goods luxury brands. Similarly, luxury sneakers barely existed as a category few years ago, now for many brands they outsell classic shoes by far and generate a hype never seen before. This shows that the importance of product categories can change dramatically within a very short period of time even in very established categories with - what many brands believe - established purchase patterns. In the future, these changes will be even faster, brutally fast, giving brands very little time to anticipate, identify, and lead the change. Hence, not just managers of categories that are disrupted by new technologies, such as luxury watches and luxury cars, need to question their business models. Every brand needs to do that.

Q: This suggests that brands need to become more faster. Can you elaborate?

Langer: Just to try to become faster is not enough. Luxury brands need to be able to identify the market dynamics in real-time. Most brands have a variety of consumer insight tools. However, what they lack is the technology and ability to make sense of the data in real time. Hence, they miss on opportunities to innovate, create extreme value, and thus - excite their customers by creating desire. Without desire, there is no luxury. Classic survey based market research is dead in my opinion. Net promoter score (NPS) and other commonly used tools are often measuring the wrong things and miss the mark on how well brand create brand equity and through that the extreme customer value that luxury brands need to be attractive. The unprecedented speed of change requires new approaches.

Q: Can you give an example?

Langer: When the pandemic started, we decided to conduct a long-term study in critical luxury markets utilizing some of the most advanced artificial intelligence powered digital insight generation tools. We call them “social intelligence”, as the software is able to make sense of hundred thousands of online conversations, identifying trends in real-time. I was surprised to analyze around April 2020 a significant emergence in the demand for corporate social responsibility (CSR) and sustainability, especially in China and Japan. We measured this before, but not to the extend that the data indicated. Just few weeks ago, the head of Asia Pacific of a major luxury group confirmed to me that over the last two months suddenly consumer behavior in his Chinese boutiques has changed: instead of just looking for a fancy bag, consumers confront the store personnel now demanding for traceability. They want to know the origin of raw materials and question if the leathers are sources ethically, just to name a few examples. If the store staff cannot answer the questions, they turn around and shop at another brand. We could identify the shift in consumer sentiment around six months before consumers changed their actual purchase behavior. Hence real-time consumer sentiment analyses have never been as important as now. And they need to lead to proactive actions.

Q: You mentioned that consumer preferences shift faster than ever before. What about competitive dynamics?

Langer: One of my favorite quotes is “the only easy day was yesterday”. Luxury markets have never been as competitive as they are now. And we are just at the beginning. The number of new brands entering the market is unprecedented across all categories. Size or history will not protect existing brands. Younger consumers could not care less. To make matters more challenging for incumbent brands, the game moves from offline to online not only in regards to selling but also in creating consumer preferences. More than 95% of all luxury purchases are initiated through the digital journey. In other words: if your brand can’t convince your customers - existing or new, it does not matter - through your digital marketing funnel before they buy, then they won’t buy. It’s that simple. Now, do you have full visibility on the competitive dynamics today? Can you tell how your brand is perceived in real-time versus your top competitors? Do you know if your top competitors or those you don’t even have on the radar yet because they are fully digital - do you know if they have become more influential towards your customers? Are you able to measure the ROI of your digital marketing spend precisely? Are you able to identify if the influencers you use are really effective? I bet that in most cases, the answer is no. And this means that there is no clarity on critical components of the competitive dynamics, period. This is why we often see brands collapsing significantly within two to four years, much faster than ever before in history. Old strategies don’t work anymore in a digital reality with hyper-empowered customers that have lower loyalty and are surrounded by the highest number of options they ever had. Remember, the only easy day was yesterday. The speed of change will significantly increase, the stakes in the game of luxury will surge further, at an accelerated rate. Only few brands will do well, many won’t survive without drastic change.

Q: You mentioned that the changes that are happening beyond the pandemic will be impacting luxury brands significantly. What are those?

Langer: We tapped into many of them already. The biggest change will come through the Generation Z, those customers born after 1995 and who are now in their early 20s. I have numerous discussions where brands telll me, “Daniel why should we care about Gen Z now. They don’t buy us.” My typical answer is, that “maybe they don’t buy you today because you are not relevant for them, not because they don’t have the financial means to buy you.” Members of the Generation Z are more affluent than any other luxury cohort at the same age entering the luxury market before. They do their homework and scrutinize brands to the core. If a brand can’t connect with them on a rational and emotional level, and can’t provide them with reasons to buy, they will move on. Probably, they don’t even consider you. Decisions to buy or not to buy happen in few seconds. Gen Z has the shortest attention span of all generations. The reason: they have to process an unprecedented amount of data being digital natives and living on social media platforms. This allows them to process things faster, take firm decisions faster, and it decreases their loyalty. If you want to reach Gen Z customers successfully, your brand story needs to be much more precise. And you need to be able to bring your key differentiating rational and emotional brand equity elements across in less than six seconds. Few brands excel in this. Not being able to do this means, you simply won’t be relevant for them ever. They won’t consider your brand later on when they are elder. Why should they? Brand preferences are built young, those brands who ignore them now, will pay a steep price. Even more concerning for brands that neglect Gen Z: it’s the most influential generation already today. Moms typically buy what their daughters love. Hence, What Gen Z prefers rapidly becomes the preference of customers who today are between forty and fifty, the core customer group for many luxury brands. This is why radically different strategies are needed for most brands.

Q: What do you recommend brands to do?

Langer: The most important is to regularly question you strategy. It is not about finger pointing internally, but to identify which gaps currently exist that prevents you from being more successful today in terms of revenue and profit growth and - frankly - to survive the next decade. When we work with brands, we find our brand audit tool incredibly useful. It’s a non-nonsense, radically focused exercise identifying all strengths and gaps that a luxury or lifestyle brand has not just in regards to the current market dynamics, but also towards the future. We always preview the next ten years of consumer shifts and take the future of each category into consideration when we analyze the strategy of brands. Doing this identifies critical weaknesses. Then we take joint decisions with the top management teams of the brands we work with on how to address these gaps and importantly, how to capitalize even more on the existing strengths. When it comes to brand storytelling it is never about “relaunching” a brand in a classical sense, but rather to identify the dimensions where the brand storytelling is not sufficient, not well defined enough, not future-proof, and not relevant and engaging. This leads to much more powerful brand executuons. Lastly, strategies mean nothing, if they are not implemented. Hence, an additional audit and optimization of the luxury brand experience is mission critical. Only when consumers perceive the brand in the same way the brand wants it to be, then the brand will be relevant and attractive. In the reality, we see many brands with unbelievable weaknesses on the “last mile”, when it comes to customer service and luxury experience creation.

Q: What about pricing?

Langer: Luxury pricing is a critical weakness of most luxury brands. Too often we still see a cost-plus approach where the price depends on product cost. This may be the right approach for cheap everyday brands you find in the grocery store or in low-end retail, but it’s completely wrong in luxury. It’s striking to me to see how many brands are priced wrongly. Interestingly, many are priced too low or don’t leverage their potential because they lack in brand storytelling and differentiation. Our research has shown clearly that the true value of a luxury brand is not in the product, it is a result of the brand storytelling. It’s one of the most underused insights and can radically change the course of a brand’s success in terms of revenue and profitability. Pricing and brand equity are very closely connected: we first have to build extreme customer value, then we are able to price for it. When I present luxury pricing in my company masterclasses, I always get the same reaction: “it’s eye opening.” Luxury pricing is not yet enough in focus, and it’s a huge opportunity.

Q: You mentioned the rapid shift in sustainability. How can luxury brands capitalize on it?

Langer: The most important is to see sustainability not as some kind of “we must do that because the market is changing” approach, hence to approach it reactively and passively, but rather to switch perspective and think how can sustainability become a competitive advantage. In my point of view it is the single biggest opportunity for luxury brands to innovate and inspire. And you never inspire by a slow and reactive approach. I believe that circular thinking is a must, not only in terms of recycling but also in terms of building long-term relationships with your customers.

Q: In closing, what should brands do now?

Langer: It’s time to act rather than to react. The luxury market will look completely different over this decade, and it will happen with the brands that are currently in the market or without them. The speed of change can feel so overwhelming that some brands have resisted to do the necessary things fast enough. This is not a viable approach to secure the future of your brand. I recommend to question everything regularly, ask many “what ifs” and identify and address weaknesses now. Within the next 12-36 months we will see an unprecedented emergence of new luxury brands, both Western and Chinese, born digitally, often launched and endorsed by the same KOL that supported the leading luxury houses before. They will target your customers with fresh ideas and new brand stories. As a result, any weakness in brand equity will come at a steep price.