Decoding Chanel’s Gen-Z Strategy

PARIS, France — At just 18 years old, Lily-Rose Depp is the ultimate in fashion royalty. The daughter of American actor Johnny Depp — almost as well known for dating industry idols Kate Moss and Winona Ryder as he is for playing Captain Jack Sparrow — and French singer Vanessa Paradis, a forever muse of Chanel designer Karl Lagerfeld, her pathway to the red carpet was practically preordained.

"We were already talking to Lily-Rose when she was 10 or 11 years old," recalls Bruno Pavlovsky, Chanel's president of fashion. "Not as an influencer, but because she is Vanessa's daughter and we believe there is a story of Chanel about mothers and daughters. That's part of the DNA of the brand, to be able to talk to all of these generations."

It also helps that Depp inherited her mother’s bee-stung lips and lithe frame; model looks worthy of attention regardless of her surname. By the time she hit her early teens, it was clear that Depp would not serve as a bit player in the drama we call fashion, but instead assume a bigger role.

It went without saying that Depp, an aspiring actress slated to star in comedic auteur Kevin Smith's next film, would enter the world of couture via Chanel, where she is currently the face of its No.5 L'Eau fragrance. She also almost exclusively wears Lagerfeld's designs for red carpet appearances, which are increasing in frequency as she racks up more acting roles. "Not only is it a brand I've known and loved for my whole life through my mother's relationship with them, but to me Chanel has always been the best of the best," says Depp. "I think Chanel's charm is completely unique and you almost can't explain it, but there's a certain magic that runs through the maison and everything they create."

Chanel’s casting of Depp as the star of its No.5 L’Eau campaign comes as little surprise. The original Chanel No.5 fragrance remains a pillar of the house and a primary driver of revenue, but it has long been associated with an aging customer. L’Eau offers a lighter, refreshing spin on the classic, much like Depp herself.

It also falls right in line with Chanel’s long-term celebrity strategy: to court ambassadors for whom Lagerfeld possesses a true affinity, from Inès de la Fressange to Caroline de Maigret. The legendary designer’s tastes vary. For instance, he likes both Katy Perry and Keira Knightley. And while youth is not a prerequisite, it is more common than not.

Besides De Maigret, who is 42 and currently starring in the house's campaign for its newly introduced "Gabrielle" suite of handbags, most of Chanel's recent faces are Millennials or members of Gen-Z. Along with Depp (18), there is Willow Smith (16) fronting an eyewear campaign, Cara Delevingne (25) posing in runway looks and with a Gabrielle bag, and Kristen Stewart (27), a perennial pick, posing with just about anything.

"The term ambassador, ambassadress, is very important to us. They need to be able to talk about the brand, to be able to explain the brand, to feel the brand. Every time we have done something that has no link with the brand it fails," Pavlovsky says. "To be able to develop such a relationship with Lily-Rose, Kristin, Vanessa Paradis, it's more about having something to share. They need to be connected with Mr Lagerfeld, with [image director] Eric Pfrunder, with [studio director] Virginie Viard. It's not that you simply have a contract and you come in and fulfill obligations. You can do that, but I'm not sure about the impact of doing it like that."

While the average age of a consumer of personal luxury goods in the US is more than 47 years old, according to a 2015 report by research firm Unity Marketing, youth has long driven the fashion industry’s advertising strategies. According to a 2014 report from Bain, shoppers over 49 years old account for more than half of global luxury spending.

I think Chanel's charm is completely unique and you almost can't explain it… there's a certain magic that runs through the&nbsp;<em>maison.</em>

Macabre or not, if fear of one’s own mortality could be linked to discretionary spending, as several studies have suggested, it’s common sense that those doing the buying would be attracted to brands that communicate youth and vitality. What’s more, the age of the luxury consumer is far younger in countries like China where the middle class is rising. There, the average luxury consumer was 33.1 years old in 2015 and 80 percent of consumers of such goods were between the ages of 25 and 44, according to consumer research firm Bomoda.

To survive far into the future, brands like Chanel must engage a new generation of consumers. By 2025, Millennials and Gen-Z are expected to account for 45 percent of the global market for personal luxury goods, according to Bain & Company.

One of the biggest considerations for brands must be the rise of the "experience economy". In the US, still the world's largest consumer market, three out of four Millennials and Generation Z favour spending money on experiences over physical goods, according to a 2017 survey conducted by GaloreMag in partnership with The Business of Fashion. Even in China, the world's largest driver of luxury growth, where there is no shortage of new wealth creation and traditional modes of marketing (celebrity + rarefied brand = desire) tend to perform better, Millennials are shifting their spending to experiences like travel.

Then there’s the rise of social media, which has entirely rewired the path to purchase. “The big change that we have seen because of digital is that people are connected earlier and earlier, and these people know everything they want to know much earlier,” Pavlovsky says. “Everyone can say something about the brand, everything that we are doing everywhere in the world is now commented on by millions of people and all of these people have a point of view. This generation knows everything they want to know already. We need to bring something to the conversation, we need to offer something on top of that.”

It might be assumed, then, that selecting someone like Depp as a brand ambassador has as much to do with her 3.3 million Instagram followers as it does her industry pedigree — even if the image-sharing platform is banned in China. “It’s the only social media platform I’ve ever been on… for some reason the other ones just don’t appeal to me,” Depp says. “There’s something more fun and artistic about taking pictures... and I like to stay pretty private so sharing the occasional picture is plenty for me.”

But is it plenty for Chanel?

BoF enlisted digital solutions agency Preen.me to gather intelligence on the house’s social media presence, analysing conversation about Chanel on Instagram — meaning any tagged posting, likes or comments — between January 1, 2017 and August 1, 2017. The resulting sample set includes 3.4 million unique Instagram posts from 633,547 users that resulted in 363 million likes and comments.

Social media chatter around Chanel is strongest in Russia, which accounts for 32 percent of the conversation, compared to 15 percent in the US and 13 percent in Continental Europe. And since the beginning of 2017, social postings related to Chanel have grown, on average, 15 percent month-to-month, with social actions — likes and comments associated with those posts — increasing 7.8 percent on average.

The greatest spike in conversation did not come from a new campaign drop or an influencer posting, but instead from Chanel's runway shows and, in particular, the haute couture shows that took place in January and July. What's more, while Depp, the social media-allergic Stewart and Delevingne (40.6 million Instagram followers) are each responsible for driving roughly the same amount of conversation around Chanel — 0.23, 0.24 and 0.22 percent, respectively, year to date, or barely anything — 48 percent of all social posts and 34 percent of all social actions around Chanel originate from accounts with less than 10,000 followers. That means, for the first time ever, it is the cult of Chanel that's driving the conversation, not Chanel itself.

“We see this new generation coming into the boutique and quite often, they know more about the brand than our organisation and people,” Pavlovsky says. “So how do we rebalance the relationship, the dialogue? At the same time, we want to continue to give our point of view... How do we give them the right information so they don’t start to have their own vision of Chanel, which is not the right one? It’s not about liking what we’re doing, it’s more to be able to be sure that they have the right content.”

In many ways, the numbers indicate that Chanel — which has been creating digital content since at least 2010 — has done an impressive job of guiding, if not controlling, the conversation. According to Preen.me, Chanel's official Instagram account is still the best at compelling followers to take action via likes or comments about the brand, followed by Delevingne, South Korean actress Park Shin-hye, South Korean rapper G-Dragon, Australian actress Phoebe Tonkin and YouTube influencer Jeffree Star, some of whom were paid to mention Chanel, some of whom were not.

What does it mean that neither Depp nor Stewart are driving social media actions, while Star — who posed with a Chanel tennis racket while wearing a denim Supreme x Louis Vuitton jacket for his July 2017 “holy grails” video, which has been viewed over 2 million times at the time of writing — is generating clicks? And if those clicks have some correlation to purchase intent, what can Chanel do to make the most of them? As the currency of traditional celebrities is falling while the currency of self-made stars is rising, finding evangelists able (and willing) to drive numbers while adhering to a brand’s preferred message and delivery is increasingly difficult.

“I don’t want to measure too many things,” Pavlovsky says. “It’s also about emotion. I’d rather have less [social actions] and more emotion than big numbers and nothing left. When people don’t like what we are doing, it’s fine. You are not obliged to like everything.”

Karl Lagerfeld shoots Lily-Rose and Cara for a Chanel campaign | Source: Courtesy

It's certainly a new world for a brand so predicated on a fantasy first constructed by Gabrielle "Coco" Chanel in the 1920s. Since Lagerfeld's revitalisation of the house in the early 1980s — right about the time many of its newest customers were born — Chanel and its long-time owners, the Wertheimer family, have navigated the ever-changing luxury landscape by retaining control over every aspect of its messaging, from the ribbed twist cap on a bottle of nail polish to the receding square light fixtures that line the ceiling of every Peter Marino-designed store. It also helps that the Wertheimers have managed to maintain a working relationship with one creative director — and his generation's finest styliste, at that — guaranteeing that the house's identity remains strong, rivalled only by leather goods house Hermès (also family owned) in terms of reputation.

That consistency, combined with Lagerfeld’s own penchant for the new and a marketing budget that has often outpaced competitors, helped to deliver decades of enviable results. “Nobody could outspend them in terms of celebrity endorsements,” says one former beauty conglomerate executive. Chanel, for some time, has been the guiding light for other luxury houses. In 2017 terms, it is #goals in the ultimate sense.

For many women, Chanel continues to represent a rite of passage. That’s often the purchase of her first “grown up” fragrance: Chanel’s Coco Mademoiselle, Chance Eau Tendre and No.5 each remained in the top five best-selling fragrances in the US from 2010 to 2015, according to a report by management consulting firm A.T. Kearney.

It can also mean collecting $28 nail polishes — often inspired by the runway collections — or buying her first chain-link handbag, more often than not a “2.55” flap bag, first introduced in 1955 and refreshed by Lagerfeld in 1990. The “Boy” bag, introduced in 2011, riffs on the flap bag with a more structured frame, while the “Gabrielle,” which Chanel rolled out in 2017 via a major campaign including Stewart, Delevingne, De Maigret and Pharrell Williams, is the house’s cleaned-up version of a carryall. Visit one of the posh neighbourhoods of Paris and it’s not atypical to see a teenage or college girl wearing a Chanel pocketbook, slung across the body with all the casualness of a plastic high street find.

And yet, as the world changes, so must Chanel’s strategy. While the private company’s financials are closely held, the firm did release figures in both August 2016 and August 2017 that suggest its approach may be gathering dust.

Valued by some analysts at more than $20 billion globally, Chanel International BV — a Dutch holding company incorporated in 1979 that is part of the Chanel empire — reported operating profit of $1.6 billion in the year ending December 31, 2015, a 23 percent decline from the previous year. Revenues that year were $6.24 billion, down 17 percent year-over-year. Another filing in France pertaining to cosmetics and fragrances indicated that the company generated €2.6 billion in that category ($3 billion at current exchange) in 2015, a 21 percent drop from the year before.

In 2016, the holding company generated $5.67 billion in revenue, down roughly 10 percent from 2015. Its net income fell almost 35 percent from $1.34 billion to $874 million, with operating income dipping 20 percent to $1.28 billion, resulting in a 22.5 percent decline in profitability. Chanel International BV’s contraction is partially explained by the sale of its subsidiary Chanel UK (which represents approximately 11 percent of its sales) to another entity, which is also under its control.

These reports do not specify what regions or categories were represented in the figures they contain, which means they may not tell the whole story. But according to a source familiar with the company’s structure, the $6.24 billion in revenue reported in 2015 does almost certainly reflect the size of the business globally that year, including sales of fragrance and beauty, as well as revenues linked to other brands owned by the Wertheimer family, such as swimsuit label Eres and firearms company Holland & Holland. What was not communicated in the filing with the Dutch Chamber of Commerce was the revenue lost in both 2015 and 2016 due to the April 2015 sale of the Bourjois beauty brand to Coty. (Chanel received 15.43 million shares of Coty’s Class A Common Stock, equivalent to about $240 million at the time.)

This generation knows everything they want to know already. We need to bring something to the conversation, we need to offer something on top of that.

The company confirmed with BoF that, on a like-for-like basis, Chanel’s actual results were flat in 2015 compared to the year before. In 2016, revenue remained stable, it said.

And yet, it is perhaps not without coincidence that global chief executive Maureen Chiquet exited the company at the beginning of 2016, with Chanel citing "differences of opinion about the strategic direction".

At the time of the announcement, the company said that chairman Alain Wertheimer — the grandson of Gabrielle “Coco” Chanel’s original business partner, Pierre Wertheimer — would serve as interim chief executive while a search took place. However, according to Chanel, no immediate transition is planned. Instead, Alain Wertheimer, who assumed more responsibility to “ensure continuity”, is working in close collaboration with other members of the leadership team.

Despite challenges, Chanel remains an industry leader. That edge could be attributed to the feeling of “magic”, as Depp calls it, associated with the brand. After all, it’s a quality that is increasingly difficult to detect in other brands, even in a fantasy world like fashion. The keen interest around its couture shows reflects this. But Chanel is aware it needs to evolve.

“We have to be clear about what we offer to this new generation. It’s a new lever,” Pavlovsky says. “We have to organise ourselves to be ready to be quite sharp in what we want to communicate.”

The brand’s L’Eau fragrance and Gabrielle handbag launches are key pillars in its new offensive. “We want to cross what the brand wants with their own brand perception,” says Pavlovsky on the digital influencers the company chose for its Gabrielle campaign. “To be able to have more impact on this new generation, you have to offer something that is more than just the vision of the brand. But on top of that you need to have influencers who can also react to this vision.”

What that doesn’t include is a push to actually turn those clicks into conversions. While eyewear, fragrance and skincare are available to purchase via Chanel.com and other e-commerce outlets, and there have been one-off experiments selling jewellery with the likes of Net-a-Porter, handbags, shoes and clothing are off limits and will remain so — for now.

It's a risky move, given that consumers at least want to see and explore products online, even if the final purchase happens in a physical store. In a Deloitte survey of UK Millennial luxury consumers, 58 percent said that they most often buy luxury products through online channels. More than half is not a percentage to ignore, even if the UK generally indexes high on e-commerce. Similar patterns are taking hold in other areas of the world. In a 2017 study of 2,000 US shoppers commissioned by luxury marketplace Farfetch and conducted by Bain & Co., those aged 25 to 35 said 9 percent of their first luxury purchases were made online, compared to only 3 percent of 45 to 54-year-olds. Bain projects that by 2025, a quarter of all luxury goods will be purchased online and that Millennials and Gen-Z will represent 45 percent of luxury spending globally.

“We are probably one of the last business models based on creation, and we want to continue that,” Pavlovsky says. “That doesn’t mean that one day we will not do e-commerce, but we are not rushing... because we want to propose the best experience.” At the moment, according to Pavlovsky, the customer buying Chanel’s accessories and ready-to-wear appreciates the exclusivity that comes with the goods being available in-boutique only.

“You can click on everything, you can buy whatever you want on e-commerce, and if you buy it with a good retailer, you can have this stuff 90 minutes later,” he notes, acknowledging that widespread convenience increases overall customer expectations. “We believe at Chanel we can put ourselves in the same direction, but we are not obliged to do exactly the same thing others are doing.” In that way, history may be on the house’s side.

This article appears in BoF's latest special print edition: “Generation Next”. The issue is available for purchase at shop.businessoffashion.com and at select retailers around the world.

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