What Makes a Luxury Turnaround Work?

In luxury fashion, successful brands can't stay static. Chinese consumers, who account for the vast majority of luxury sales growth, are moving quickly along the maturity curve and increasingly demand new and compelling reasons to buy more. Yesterday's product icons work to a point, but for many they're starting to look expected. Indeed, smart brands know that sustained desirability is built from a special mix of heritage and innovation.

Those that didn't see this coming and managed their marketing strategies with a more-of-the-same logic must go back to the drawing board and try and reboot their brands. Meanwhile, brands that have remained on the front foot and enjoyed strong sales momentum have the ability to conquer new space in the market, even outside their core categories.

At present, luxury houses are putting a lot of energy towards transforming their brands, from Bottega Veneta's aesthetic reinvention to Burberry's attempts to move upmarket. All the more so, as Gucci has recently made it obvious to all that a brilliant turnaround can produce very significant value. But there are several different genres of turnaround strategies, with significantly different probabilities of success.

1. Recapturing Aesthetic Relevance

Brands sometimes hit gold with a certain product or style: "intrecciato" for Bottega Veneta or "metal studs" for Valentino, for example. The problem is that after so many years of success, and after so many consumers buying into these styles, brands risk becoming boring if they don't invent anything new. If you plot their organic growth over time — ideally stripping out the contribution made by retail expansion — you see a parabolic curve.

What we've learned over the years and working in the industry, is that creative directors — like virtually all artists, from painters to musicians — tend to produce variations on a theme. And this is simply not good enough in a fast-moving market. The implication is that brands are forced to change creative directors (or, have a pool of diverse creative talent working together in parallel) if they want to stay fresh and continue to attract consumers to their stores.

While matching the right design talent to the right brand is undoubtedly more art than science, it's nonetheless straightforward relative to other turnaround challenges and — if what we are talking about is getting a brand back to relevance within a similar fundamental framework to the past — you probably have a success rate of over 50 percent. Positive examples of this are Gucci (under Alessandro Michele), but also Balenciaga (under Demna Gvasalia) and Bottega Veneta (under Daniel Lee).

Brands must change creative directors if they want to stay fresh.

Alessandro Michele has been able to reconnect Gucci with its irreverent side — a very prominent trait under Tom Ford. While Ford interpreted this through a sexy lens, Michele has recast the same underlying trait with very contemporary streetwear-friendly interpretation. Daniel Lee has been able to reignite interest for intrecciato by reinventing it. Some core brand elements of the Bottega Veneta brand have remained untouched — the leather is still impossibly soft — but its famous interwoven pattern has been made wider to stimulate consumers to buy again. This is proving a very effective evolution, embraced by consumers despite the Covid-19 pandemic, as parent company Kering's 1Q20 results clearly reflect.

Maintaining aesthetic relevance is like mowing the grass, however. It’s not a problem that can be resolved once and for all; you must continue to work on it. What is new today, will be déjà vu tomorrow. Hence, you must continue to update and refresh your creative proposition and team.

2. Expanding Into New Categories

A very different kind of brand turnaround involves category expansion. Can a brand famous for product category X successfully move into product category Y? Here, the success rate is heavily dependent on the starting point. To simplify: a) the less specialised the brand, b) and the higher the average price of its root category X, the higher the probability of successfully moving into category Y.

Let’s go through a few examples:

Couture brands are the ideal starting point. Here, we are talking about brands like Chanel, Dior, Valentino, Saint Laurent and Versace. These brands are ideal because they start from very high ground: a couture dress commands a very high price, meaning almost any other category a couture brand could branch into would require its customers to spend less money in absolute terms. Let's take the example of Chanel. A Chanel evening dress can easily cost $50,0000, while a Chanel handbag can cost as relatively little as $5,000, making this look like a bargain to consumers in the habit of forking out much more. What's more, with couture brands, their appeal is driven by their wider allure and style, not by the fact that they are thought to be specialised in a certain product category. Take the example of Patek Philippe, which is also selling watches at a very high price. Does this mean they can sell handbags? Obviously not, because there is no connection between Patek Philippe's brand equity and the new category. As a rule, fashion brands (in couture or ready-to-wear) can travel faster and more broadly across categories. Their success rate in branching out into new categories is high.

Footwear brands are a poor starting point. Here, we are thinking of brands like Jimmy Choo, Tod's, Salvatore Ferragamo and even über high-end Caovilla. Footwear is a relatively low-priced category. How much do people spend on average for a pair of shoes? When they spend a lot, they maybe spend $1,000 (if we exclude custom made products like John Lobb). When you are Tod's and you sell shoes for $400-500, your customers will think you are very expensive when you offer them handbags at $1,500. We cannot mention a single footwear brand which has been successful in moving into other product categories. Their success rate, thus far, is essentially nil.

Everything else in between is very much hit and miss. We have examples of jewellery brands that have been successful in moving into watches (Cartier and Bulgari), as well as watches brands that have been successful in moving into jewellery (Piaget). We even have jewellery brands that have been successful (after a number of trials) in moving into leather goods (again Bulgari). Moncler is apparently successful in moving into knitwear and footwear. In this endeavour, the general rule is that it takes a long time and one must be patient. Often, there is a very narrow path to success, which links the new category to the core equity of the brand: Bulgari succeeded in leather goods only when it concentrated its handbag offering on Serpenti, and not when it tried to sell a broader handbags assortment, for example. Overall, the success rate for non-couture brands attempting category expansion is average to low.

Can an overexposed brand become cool and exclusive again? Only very rarely.

Bulgari is a very interesting outlier. It is typically thought that hard luxury brands — often seen by consumers as specialists in their field — are very difficult to bring to new product categories. And yet Bulgari has been able to move into watches (which seems a rather easy task for a jewellery brand, but then look at Tiffany’s poor track record…), fragrances, leather goods and even hotels. Each new foray has several links to the Bulgari DNA: its hotels are similar in style to the Bulgari HQ's and the brand's founding aesthetic; its fragrance bottle designs reflect iconic Bulgari design traits. But by and large, Bulgari’s success remains the exception.

3. Coming Back From the Dead

Sometimes brands over-expand and become ubiquitous. Luxury brands are selling the perception of exclusivity (even if they move millions of units). A huge commercial success, if badly managed, can bring brand equity destruction. We have seen this in the US a number of times, with CEOs driven by short-term revenue goals without thinking too much about the long-term health of the brand. The mismanagement of Coach and Michael Kors are examples of this. In Europe, one could think of Pierre Cardin or Gucci in the 80s and 90s.

The question is: can a brand that was once seen as cool and exclusive, but later became overexposed, ever come back to being perceived as attractive and exclusive again? The answer is only very rarely, and at the cost of very significant contraction before a rebirth. You virtually have to disappear, before you come back again. This is easier to accomplish when you are still relatively small — like Gucci in the 80s and 90s — than when you are still making a ton of money through countless factory outlets and promotions, and you are a public company.

Indeed, this can quickly become a vicious cycle: an overexposed brand struggles to attract consumers to its flagship stores to pay full price for its products; hence its best quality stores start to produce lower profits and ultimately move to the red; this requires management to find new ways to make money to sustain the business, which too often means opening more factory outlet stores. But selling more off-price makes consumers even less likely to pay full price, and so on. This is the predicament of many of the largest American brands in the sector.

In sum, coming back from a period of overextension to being attractive and exclusive once again has a very low probability of success, especially if there are financial pressures at the same time.

4. Moving Up in Price Point

Here, we are referring to the attempt brands may make to significantly change their position in the broader brand hierarchy in a category. (This is a very different task to just increasing prices in line with a broader category’s price inflation trend.) I can think of only one real success case here: Louis Vuitton after Yves Carcelle.

The challenge we are talking about here is the one Marco Gobbetti has chosen for Burberry, which is trying to move upmarket, especially in handbags: rising from being a price follower to being priced in line with Gucci, Louis Vuitton and Prada. Good luck with that. It very rarely works. When it does, it typically works if the brand has underlying strong momentum, or very significant firepower. Like when Louis Vuitton made a choice to move into more expensive handbags — formerly the exclusive domain of Hermès and Chanel — with the launch of its Capucine line. While this has proven to be possible, the success rate is typically low.

Luca Solca is head of luxury goods research at Bernstein.

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