Market For Luxury Goods Management Essay

This chapter will introduce the reader to the subject at hand and why the chosen research area is of interest and relevance for further development. Finally, the chapter includes a problem discussion, which in turn ends up in the research purpose of the dissertation.

You walk down the street in New York, and every fourth woman is carrying an Hermes Birkin bag.” Investment banker Gail Zauder of Elixir Advisors, referring to a famous handbag with a two-year waiting list (Foroohar and Margolis, 2005).

As the citation above illustrates, the market for luxury goods has been undergoing a significant shift over recent years. Products that only a few could afford are becoming accessible to more and more consumers. In their book published in 2003, consultants of the famous Boston Consulting Group revealed the trend of saving on basic goods in order to purchase at least some kind of luxury goods later on. This phenomenon is related to the emotional attachment that consumers have to certain product categories. Another point to be mentioned is that not only is the market for luxuries expanding in developed countries but it is also prospering in emerging economies (Galbraith, 2005).

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However, the concept of luxury is itself changing. The BCG consultants mentioned above separate new and old luxury goods. While brands like Louis-Vuitton or Dolce & Gabbana represent the traditional luxury, the “new luxury” products are not that exquisite and are widely consumed by the middle-class. Nevertheless, in comparison with conventional goods, “new luxury” goods stand out with superior performance and emotional appeal (Silverstein, Fiske, 2005). For instance, while Aston Martin and Ferrari have always been considered as extremely luxurious, the 3-series BMW convertible might be an example of the “new luxury”. The same trends are present in markets such as electronics, fashion clothing, fragrances and cosmetics, and entertainment.

Since consumer behavior does not abruptly change when national borders are crossed (Farley and Lehmann 1994) and segments of consumers across national boundaries might be more similar than those within the same country (Hassan and Kaynak 1994; Hassan and Katsanis 1994), the major challenge companies are facing in an international marketplace is to identify and satisfy the common needs and desires of global market segments, requiring a global level in research methodology and models (Hofstede et al. 1999). In this context, a major objective of global marketing strategies is the identification and profiling of potentially global consumer segments such as the cosmopolitan luxury consumers who travel frequently, speak more than one language, shop in international department stores, and – as opinion leaders – often influence the purchasing behavior of other consumers (Anderson and Engledow 1977). Regarded as a common denominator that can be used to define consumption across cultures (Bourdieu 1984; Dubois and Paternault 1997), luxury is a main factor that differentiates a brand in a product category, (Kapferer 1997) and a central driver of consumer preference and usage (Dubois and Duquesne 1993). Nevertheless, although the luxury market has been increasing greatly over the last decade and the marketing literature has recently seen substantial interest in the study of luxury brands, little is known about how to best market and monitor luxury brands (Vigneron and Johnson 1999, 2004).

Over the past two decades, the luxury market has undergone some dramatic changes. Estimates are that luxury spending in the USA is “growing more than four times as rapidly as spending overall” (Frank, 1999, p. 30), with total sales in the USA of $400 billion annually. A variety of goods are classified as luxury goods, including wine, automobiles, fashion, food, and jewelry, so it is somewhat difficult to determine the size of the market. Cars and second homes are some of the most booming luxury categories (Frank, 1999).

Although luxury is moving to the middle market, it is unclear how the middle market perceives luxury. There is little empirical evidence of which categories of goods and services are perceived as luxuries – that is, the “things you have that I think you shouldn’t have”.

1.2 Problem Statement

In earlier days, luxury brands were the preserve of the privileged few, but now they have become more affordable to many more middle-market consumers. Take Britain, for instance: spending on luxuries has increased by 50% in the last decade, compared to a rise of 7% on basics (Keane & McMillan 2004). Due to this trend, luxury brands that feature premium price, prestigious name and global market play an increasingly important role in profit generation for not a few international corporations, like the Lexus automobile for Toyota, Moet & Chandon champagne for LVMH and the Montblanc fountain pen for Richemont. In the international market, the ‘democratisation’ of luxuries not only presents new business opportunities but also poses enormous challenges or finding effective strategies to maximise purchases out of these opportunities. In order to explore how luxury-brand marketing managers may elicit more purchase from their target consumers, we have first to gain a deeper understanding of why consumers buy luxuries. The motives for acquiring luxury brands were traditionally regarded as constrainable to the notion of ‘buying to impress others’, which still more or less serves a strategic principle for the marketing management of luxury brands. Thus, there is a tendency for marketers to reduce the utility of luxury-brand products to the display of prominent achievement and the enhancement of sociality. However, the notion of ‘buying to impress others’ has already been undergoing modifications. An emerging view is that the two types of luxury-brand consumption – socially oriented and personally oriented – should both be considered in the marketing management of luxury brands. As existing marketing literature shows, luxury-brand marketing to the segment of personally oriented consumers has not received the full benefit of theoretical and empirical investigation. The current study, incorporating relevant theoretical frameworks and empirical findings into conceptual development, will aim to investigate the luxury-brand purchase value not explainable by ‘buying to impress others’.

1.3 Research objectives and questions

Consumer behaviour towards luxury goods can also be affected by age. Different age groups may view luxury items differently. Mature age groups may view luxury products differently in comparison with today’s teenagers, due to the effect of technology that the previous generation did not have (Hauck & Stanforth, 2007). This research will limit range of age groups concerning late adolescent between ages 18 to 30, which is known as “generation Y”. Most previous research ignored motivation factors that affected consumer behaviour in purchasing “things that is not necessarily needed” in other words, luxury (Twitchell, 2003, p. 43). However, this research will define in depth motivation factors such as fashion, image (face), and media.

The purpose of this study is to uncover consumer behaviour of young respondents who purchase luxury brand products. The perspective that luxury is “things you have that I think you shouldn’t have” led to the development of the following research questions:

• Does age impact consumers’ perceptions of luxury goods and services?
• What are the motivational factors that encourages young consumers into purchasing luxury brand products ?
• How culture differences between Eastern and Western countries influence consumers into purchasing luxury brand products?

1.4 Research Methodology

Once it has been decided to carry out this research, questions as to why this topic should be investigated and which problems should be considered may begin to be considered. In this way, the objectives and motivations for the topic are formed. Next, related literature on subjects such as consumer behaviour may be collated in order to understand the past and present developments of luxury goods industry. At the same time, the demarcation line and the development of luxury industry are collected. Most of the information needed for this research will be obtained from a review of existing texts. These resources generally come from academic journals, while other points of view are searched for in books, websites, and general news reports as well. This would then constitute a review of the literature on the luxury industry.

The survey method will be used for data collection and questionnaires will be distributed online for convenience to reach those students who have returned to their home countries from the UK.

1.5 Expected contribution from the study

Generally, it is hoped that the theoretical discussion and empirical findings that will be yielded by the current study may:

• demonstrate the necessity of taking a broader perspective in exploring the topic of luxury-brand marketing management
• enrich our understanding of the antecedents and consequences of personal orientation towards luxury-brand consumption
• analyse why socially oriented and personally oriented consumers are classifiable as two distinct segments in the luxury market,
• provide strategic recommendations for enhancing luxury-brand purchase value for personally oriented consumers.

1.6 Outline of study

This dissertation consists of five chapters (see Figure 1.1). In chapter one, a relative broad description is given in the beginning, providing the reader with a background and discussion of issues related to the problem area. This discussion lands in a specific research problem, which has been broken down into research questions. Chapter two gives a presentation of theories relevant for the research problem. Continuously, a description and justification of the methodological approaches chosen in this thesis is given in Chapter three. In chapter four the received empirical data is presented and contains an analysis of the collected data against the theory. Finally, conclusions and implications are presented in chapter five.

Fig.1.1: Outline of the Study

Chapter 2

Literature Review

In this chapter we present the theoretical concepts we have used in this study. The aim of this literature review is to generate awareness, understanding, and interest for studies that have explored a given topic in the past.

2.1 Introduction

In earlier days, luxury brands were the preserve of the privileged few, but now they have become more affordable to many more middle-market consumers. Take Britain, for instance: spending on luxuries has increased by 50% in the last decade, compared to a rise of 7% on basics (Keane & McMillan 2004). Due to this trend, luxury brands that feature premium price, prestigious name and global market play an increasingly important role in profit generation for not a few international corporations, like the Lexus automobile for Toyota, Moet & Chandon champagne for LVMH and the Montblanc fountain pen for Richemont. In the international market, the ‘democratisation’ of luxuries not only presents new business opportunities but also poses enormous challenges for finding effective strategies to maximise purchases out of these opportunities.

In order to explore how luxury-brand marketing managers may elicit more purchase from their target consumers, we have first to gain a deeper understanding of why consumers buy luxuries. The motives for acquiring luxury brands were traditionally regarded as constrainable to the notion of ‘buying to impress others’, which still more or less serves a strategic principle for the marketing management of luxury brands. Thus, there is a tendency for marketers to reduce the utility of luxury-brand products to the display of prominent achievement and the enhancement of sociality. However, the notion of ‘buying to impress others’ has already been undergoing modifications. An emerging view is that the two types of luxury-brand consumption – socially oriented and personally oriented – should both be considered in the marketing management of luxury brands. As existing marketing literature shows, luxury-brand marketing to the segment of personally oriented consumers has not received the full benefit of theoretical and empirical investigation. The current study, incorporating relevant theoretical frameworks and empirical findings into conceptual development, aims to investigate the luxury-brand purchase value not explainable by ‘buying to impress others’.

2.2 What is luxury?

The English word ‘luxury’ derives from the Latin term ‘luxus’ and is defined as ‘the state of great comfort and extravagant living and an inessential but desirable item’8. However, we should keep in mind that we are experiencing one of the greatest shifts in consumer buying habits and tastes since the 1950’s according to the Boston Consulting Group and thus also a redefinition of luxury is required, provided by consumer’s luxury experiences as Dubois and Czellar (2002) suggested. While often ‘prestige’ and ‘luxury’ are used synonymously, Vigneron and Johnson (1999:2) established ‘three types of brands which were categorized as prestigious: up market brands, premium brands and luxury brands, respectively in an increasing order of prestige.’

Fig 2.1: Defining three levels of prestige

Source: Vigneron and Johnson (1999:2)

2.3 The Marketing of Luxury Goods

The marketing of luxury goods products is an area of both the academic and practitioners marketing literature that has received little attention and is relatively (Nueno and Quelch 1998) sparse. It is immediately evident from the literature that there is a lack of consensus particularly among academics regarding the definition of luxury goods products. Although a great deal of effort has been made by marketing researchers in their attempt to classify products into various categories: convenience goods, shopping goods, specialty goods and preference goods (Antil 1984; Murphy and Enis 1986; and Sheth et al. 1988), there are relatively few classifications relating specifically to luxury goods products.

It is undoubtedly the case that when scholars attempt to arrive at a definition, the underlying context of the definition is important. There is a strong argument that products cannot be sorted into simple categories of luxury and non-luxury by appearance or intrinsic qualities of the goods themselves; they have to be put into their socio-economic context (Veblen 1899). There is also an argument that the socio-economic context needs to be defined within the context of a country’s framework. In this setting, a luxury goods product is something that is definitely out of the ordinary in terms of daily living needs. For example, BMW, Lexus, Mercedes, are all considered luxury cars in the US, Europe and other affluent nations. However, a basic car could be considered a luxury in some countries because of their low economic conditions. Veblen (1899), in his celebrated text ‘The Theory of the Leisure Class,’ discussed luxury goods in a social context. Firstly he saw the consumption of luxury goods as a “conspicuous waste”, thus, indicating that the status of luxury goods depends on both the product attributes and the consumer (especially socio-economic status).

Secondly, he concluded that “an article may be useful and wasteful both, and its utility to the consumer may be made up of use, and waste in the most varying proportions”. Both Spillman (2002) and Alexander and Smith (2001), developed this treatise further within a framework of social culture and taste. Psychology gives another approach to the definition of luxury goods products. The work of Lunt and Livingstone (1992) and Matsuyama (2002), (which examined mass consumption and personal identity, and the relationship between necessity and luxury), are examples of this. For instance, two persons with equal intelligence, and equal frames of reference can have a different opinion on the meaning of luxury. If we examine a luxury goods product in the context of the degree of convenience that it gives to its user, a car is generally not regarded as a luxury in rural areas, with poor or non existent local transport, and perhaps where the nearest shop, or hospital, or doctor is fifty kilometres away. However, it can definitely be considered a luxury by people living and working in a large town or city, where most things in life are usually within a couple of bus stops, or walking distance.

To date the most widely accepted typologies have in common the idea that luxury goods products are modifications of a base product that involves satisfying consumer needs. The diversity of phenomena encompassed by a broad understanding or definition has consequently led researchers to focus on a variety of perspectives. These perspectives have led to some classification schemes, and general frameworks. Alleres (1990) builds on the dimension of socio-economic class in the context of luxury goods and sees it as a hierarchy consisting of three levels based on the degree of accessibility.

Fig 2.2: A Hierarchy of Luxury Goods Products (Alleres 1990)

The inaccessible luxury level is related to an elite socio-economic class, and is identified with absolute product distinctiveness. It is associated with products that are extremely high-priced, which offer the owner exceptional social prestige. The intermediate luxury level describes a category of luxury products that is attainable by the ‘professional’ socio-economic class. The accessible luxury level describes luxury products that are attainable by the middle socio-economic class who are implicitly perceived as trying to achieve a high social status by their purchase behaviour. The degree of accessibility also reflects the social class level. Hence the extent or level of luxury that a goods product describes can be illustrated in terms of the distinction between whether the product is perceived as accessible or inaccessible by the consumer. It can be argued that within an array of complex product offerings, this hierarchy of luxury goods products can be reduced to two basic levels, which facilitate product positioning (as shown in Fig 2.2). The difference between the intermediate level of luxury goods products and the accessible level of luxury goods products is undoubtedly fuzzy at best, particularly given the shift of socio-economic groups within western industrial nations towards a professional middle class position.

Fig 2.3: Product Positioning of Luxury Goods (Renand 1993)

Renand (1993) argues that the category of inaccessible luxury goods products can be considered as personalised luxury products that are characterised by an extremely high purchase price. The price for these luxury goods makes this level of luxury exclusive, being far above the norm for the generic product type. This has the effect of making these luxury goods products aloof in the marketplace. The extent to which these products can be positioned as inaccessible or accessible depends on the degree of remoteness they exhibit in the marketplace compared with their consumer perceived position. This in turn gives rise to two positions: the sellers’ desired or wanted position, and the consumers’ perceived product position (as shown in figure 2.3). In order to classify a luxury goods product as accessible or inaccessible, it is necessary to understand the sellers’ desired/wanted product position and the consumers’ perceived product position. It is argued that this task constitutes the first stage of analysis in the development of effective marketing communication programmes. The results of such research have significant and different implications for the development of marketing communication plans. For example, if we consider two relative positions, firstly where the sellers’ desired/wanted position of the luxury goods product is congruent with the consumers’ perception of it, the product could be considered as ‘standard’ in terms of the communication programme, and the task of marketing communications is then relatively easy. Secondly, if a differential exists in terms of the perceptions of the sellers’ desired/wanted position for the luxury product, and the consumers’ perceived position, then the task of the communication programme is clearly more difficult, (figure 2.3 shows a number of possible positions). The extent to which luxury goods products exhibit degrees of accessibility can be seen also to be influenced by whether they will be consumed largely in public or in private. If the luxury goods product is consumed visibly then interpersonal influences on buying behaviour will be significantly greater. On the other hand, it can be argued that accessible luxury products are owned by virtually everyone; hence the influence of others is on the brand of luxury goods purchased and not on product ownership. Bearden, Ingram and LaForce (1995) discuss this relationship and identify two classes of consumer luxury goods products: Private luxury goods and Public luxury goods.

Although these perspectives of luxury goods products enable researchers and practitioners to better understand the meaning of luxury goods, the definitions could be argued as being deficient in that they lack quantitative substance. The discipline of economics provides perhaps a more precise definition in that it can be empirically tested based on Engel curves. These curves are used to depict the relationship between total expenditures, and the quantity of particular goods products purchased. A necessity goods product has a downward sloping Engel curve since the proportion spent on such goods decreases as income increases. A luxury goods product it is argued has an upward sloping Engel curve indicating that as income increases, a greater proportion is spent on these goods. Similarly, economics can also provide the basis for a definition of luxury goods derived in more historical terms with respect to microeconomics by considering other traditional goods categories, e.g. inferior and Giffen goods. Lancaster (1966) in some groundbreaking work on goods characteristics provides an important approach to understanding consumer demand and provides a useful insight into understanding the demand for luxury goods. It is argued that consumers demand products not in themselves, but for the characteristics that they bundle up. Products compete in the market with other products that have a similar range of characteristics but not with products that have only a small proportion of the characteristic attributes. However, marketers would argue that these perspectives provide a rather limited insight for marketing research and marketing planning. Dubois and Duguesne (1993), in the context of strategic planning, comment “a proper evaluation of competitive position is a condition of survival, but how can one assess luxury products when the definition of what is or is not a luxury brand in a given product category is by no means always obvious”. It is evident from the literature review that considerable confusion still exists in terms of definition, and there is a scarcity of empirical work in this area.

2.4 Luxury Perceptions and Consumption

A vast body of knowledge exists with regards to the attitudes involved in the purchase of clothing. The studies comparing consumers’ attitudes toward purchasing domestic or foreign apparel have found that most consumers prefer foreign rather than domestic clothes if it is more expensive (Mohamad et al., 2000), luxury brands (Mohamad et al., 2000; Beaudoin et al., 1998), more fashionable brands (Beaudoin et al., 1998) and favourable country of origin (O’Cass and Lim, 2002). Thus, it is important to examine the fashion context in relation to status consumption.

2.4.1 Teenagers and status consumption

The teenage market is a vigorous and extremely competitive environment. It represents a broad market that can be generalised (Piacentini and Mailer, 2004). Though it offers plenty of opportunities for new entrants, and great scope for innovations, the target audience is notoriously hard to please (Taylor and Cosenza, 2002). All facets of the media (i.e. fashion, television, the Internet and music) form significant influences, and make teens savvy towards what they want (Tan, 1999;;). Also, many of the researchers have suggested that teenagers are lavish spenders when it comes to branded and luxury products (Piacentini and Mailer, 2004; Tan, 1999; Taylor and Cosenza, 2002). Further, O’Cass and Frost (2002) proved that younger consumers are driven by the need to possess and display status brands. Both Piacentini and Mailer (2004) and Wong and Ahuvia (1998) have indicated that western teenagers are more likely to be involved in luxury consumption.

Many researchers have explored the trend of status, symbolic or prestige consumption for different purposes. For instance, Eastman et al. (1999); Deeter-Schmelz et al. (2000); and Vigneron and Johnson (1999) were interested in the development and validation of a consumption scale, whereas O’Cass and Frost (2002) looked to broaden the understanding towards status brands and the behaviours associated with it. On the other hand, Coelho and McClure(1993) focused on the fashion industry by analysing status consumption from an economic perspective. In Piacentini and Mailer’s (2004) study, the underlying assumption was that teenagers do engage in status consumption on clothing for different purposes and preferences. This makes its purpose comparable to that of the present study.

Researchers have defined status consumption as the driving force in enhancing social standing through conspicuous consumption ( Tanner and Roberts, 2000). Conspicuous consumption involves the public consumption of luxury products that signal wealth, status and power (Bagwell and Bernheim, 1996). Consumption of status or symbolic products also assists in enhancing social recognition and self-concept (Eastman et al., 1999; Deeter-Schmelz et al., 2000; O’Cass and Frost, 2002; Piacentini and Mailer, 2004). Eastman et al. (1999) and O’Cass and Frost (2002) pointed out that status-oriented consumers will only purchase products that represent status in the eyes of others whom they feel are significant. At some stage, status consumption is viewed as materialism (Tanner and Roberts, 2000; Wong and Ahuvia, 1998). Thus, it is arguable that status consumers are more likely to buy luxury apparel than non-status seeking consumers, as it satisfies their symbolic needs (Goldsmith and Stith, 1993).

However, Piacentini and Mailer (2004) indicated that teenagers from wealthier families having more disposable money are less likely to be involved in status consumption. On the other hand, teenagers from the lower and middle social classes are more likely to be involved in status consumption to display their “wealth”. Consistent with studies from Eastman et al. (1999), Kempen (2003), and O’Cass and Frost (2002), status seeking consumers can come from any income or social class level. On the contrary, Chao and Schor (1998) demonstrated in a study on cosmetics that the status seeking consumers are mostly Caucasian, higher in education and income, and live in urban communities. Further, Deeter-Schmelz et al. (2000) ascertain that consumers’ income have minimal impact on prestige concept.

O’Cass and Frost (2002) indicated that consumers may recognise the brand name and image associated with a status brand. However, these same consumers may not necessarily be familiar with other features of the brand. Grace and O’Cass (2002) determined that a status product possesses good quality and a favourable brand name. Thus, country of origin image or association impacts on consumers’ perceptions or beliefs toward particular brands (Mohamad et al., 2000). Wong and Ahuvia’s (1998) study on luxury consumption ascertains that western consumers are more likely to judge each product independently regardless of the brand, manufacturer, and country of origin as compared to Asian consumers. This finding contradicts many other studies on country of origin (Beaudoin et al., 1998; Gurhan-Canli and Maheswaran, 2000; Haulb, 1996; Javalgi et al., 2001; Laroche et al., 2002; Ahmed and d’Astous, 1993; Ulgado and Lee, 1998).

2.4.2 Country of origin

According to Morello (as cited in Javalgi et al., 2001), the term country of origin has been widely used for over 100 years. Country of origin, country of manufacture or country of brand origin have been considered as extrinsic cues of a product, and there has been a large amount of evidence supporting their significant effects on consumers’ product evaluation (Gurhan-Canli and Maheswaran, 2000; Ulgado and Lee, 1998; Kaynak and Kara, 2002; O’Cass and Lim, 2001, 2002). Knight and Calantone (2000) and Haulb (1996) have also proved that these cues have a significantly direct effect on attitudes and beliefs towards a product. The goal of these researchers was to investigate consumer images of countries and brands, and to measure the relative importance of certain attributes when consumers buy these products.

However, these terms are becoming increasingly misleading or confusing in the current market, where hybrid products typically comprise more than one country’s contribution towards the completed product (Haulb, 1996; O’Cass and Lim, 2001, 2002). As a result:

Country of brand origin may be the reason consumers still attach certain cultural characteristics to a brand when specific information about the foreign country is not available (O’Cass and Lim, 2002, p. 763).

Therefore, it is assumed that country of brand origin (O’Cass and Lim, 2002) would be a more appropriate term to use in the examination of consumers’ perceptions on brand origins.

Many studies have focused on consumers’ perceptions of domestic versus foreign made products or brands in relation to ethnocentrism (Kaynak and Kara, 2002; O’Cass and Lim, 2002; Supphellen and Rittenburg, 2001; Ulgado and Lee, 1998). As previously discussed, although most studies on the fashion industry in Australia found that the consumers have strong propensities to buy Australian made apparel, more foreign made rather than domestic made apparel is still being purchased. Consumer ethnocentrism is displayed in this instance, where consumers believe that the purchase of foreign-made products is unpatriotic and harmful to the local economy, and imports can result in the loss of local jobs (Durvasula et al., 1997; Kaynak and Kara, 2002; Supphellen and Rittenburg, 2001). Researchers also found that younger Australians are more likely to purchase foreign made apparel, which means that they have lower consumer ethnocentrism (Fischer and Byron, 1997; Patterson and Tai, 1998).

2.5 Consumer Behaviour

In the past, the concept of consumer behaviour has only been discussed in the field of economics. However, it has already become a subject which crosses many professional areas, including economics, psychology, sociology and also marketing. Managers could try to go deeper into consumer psychology in order to set up a suitable marketing strategy. For example, they could discover the demands and desires of consumers and try to design products and services to meet them.

2.5.1 Definition

Nicosia (1968) defines consumer behaviour as the action of purchasing without the intention of reselling. Williams (1982) considers that consumer behaviour is emotional, psychological and physical behaviour or reactions which are created during the process of purchasing a product or a service. Kotler (1998) also claims that understanding consumer behaviour is understanding the ways individuals or groups choose, purchase and use products, services, ideas and experiences in order to satisfy their desires and demands. Engel, Kollat and Blackwell (2001) have a deeper perspectiv