LUXURY LEATHER GOODS - docshare01.docshare.tipsdocshare01.docshare.tips/files/26143/261433217.pdf · industry analysis was obtained through extensive ... THE BUSINESS LANDSCAPE FOR

LUXURY LEATHER GOODS


INDUSTRY COMPETITIVE ANALYSIS

JANUARY 13TH 2012

BY: Violeta Cebreros



ACKNOWLEDGEMENTS

I would like to thank professor Dr. Ingo Böbel for shareing his knowledge and for his

invaluable support and guidance. Deepest gratitude are also due to all other professors at the IUM

since all aspects come into play when doing a comprehensive industry analysis.


EXECUTIVE SUMMARY

The objective of the present industry analysis is to provide an overview of the main trends

and characteristics of the luxury leather goods industry to further understand the underlying

drivers of supply, demand and ultimately profitability in the sector. All the data collected for the

industry analysis was obtained through extensive research on Internet and, thus all sources are

primary source such as reports from Euromonitor, Datamonitor, Bain & Company,

MillwardBrown, BCG, etc.

Luxury leather goods comprise a subcategory of luxury accessories and typically refer to

products such as handbags, wallets and belts made out of high quality leather. The category of

luxury leather goods is estimated at a value of €28 billion for 2011, while the global personal

luxury goods markets is estimated at a value of €191 billion for 2011.

Todays post-recession economic environment is favorable for the luxury market, with demand

soaring due to an economic boom in emerging markets, especially China. However, high taxes in

the Asia-Pacific markets have lead to price differentiation and lower margins for the companies.

Another industry trend that has led to lower margins is the cost increases due to steep price

increases of high-quality leather hides provoked by scarcity, leading many of the companies to

seek vertical integration with suppliers to ensure their supply. Moreover, demand has also

experienced an increase due to a shift in the demand due to a change in consumer preferences.

Increasing consumer consciousness has swifted preferences away from ostentatious consumption

and towards the high-end classic products which are considered durable.

In terms of competitiveness, the luxury leather goods sector is competitive due to the large

number of brands in the market, which find the industry attractive due to the high profit margins.


However, differences amongst products and sellers exist- conglomerates and single-brand

companies, core business in fashion or core business in leather goods, artisanal production or

fabric production and, finally, brand. In the luxury leather goods sectors brand image is a key

differentiating factor amongst firms, specially since it commands a premium and builds on

customer loyalty. Key players in the industry include Louis Vuitton, Gucci, Prada, Chanel,

Hermès and the likes. Although most key players are of European origin they all compete at a

global scale. Most luxury brands have built a considerable network of directly-operated boutiques

which give them more control over their distribution, hoever, they still rely on department stores

to broaden their scope and specially to reach emerging markets where brands are still to set their

own operations.

Overall, the luxury leather goods industry is thriving and is expected to continue growing

in years to come. For brands to maintain their positioning and market share they embrace the new

consumer trends and adapt their business strategiy to remain profitable. They must move away

from ‘affordable luxury’ and focus on ‘absolute luxury’ products, this will allow them to find a

better balance between demand and supply, reducing some of the strain on supply provoked by the

scarcity of high-quality leather. With this change the gap between supply and demand is reduced

in terms of volume but not value as constumers are now purchasing a higher price-point, which

will also lead to higher margins for the companies.

TABLE OF CONTENTS


I. INTRODUCTION

1

II.THE LUXURY LEATHER GOODS INDUSTRY

2

KEY FIGURES 3 III.MACROECONOMIC ENVIRONMENT SHAPING THE BUSINESS LANDSCAPE FOR THE LUXURY LEATHER

GOODS INDUSTRY 4

PESTEL ANALYSIS 4 IV.COMPETITIVE ANALYSIS

9

MARKET STRUCTURE 10

KEY INDUSTRY PLAYERS 10

THE FIVE FORCES MODEL 16

INDUSTRY DYNAMICS & INTERACTION AMONGST PLAYERS 21 V.DEMAND AND SUPPLY OF LUXURY LEATHER GOODS

22

SUPPLY OF LUXURY LEATHER GOODS 23

DEMAND OF LUXURY LEATHER GOODS 24 VI.CONSUMERS AND CONSUMER TRENDS-WHO ARE THEY? WHAT DO THEY WANT? WHY DO THEY

BUY? 25

VII. CONCLUSION

28

VIII. REFERENCES

30

IX. APPENDIX

1



1

LUXURY LEATHER GOODS INDUSTRY COMPETITIVE ANALYSIS

I. INTRODUCTION

The main objective of the following report is to provide a snapshot of the luxury leather

goods sector today. What does it include? Who are the major players? Why and what are

consumers buying? All of the information collected for the industry analysis is product of

extensive research on Internet, it all consists of primary sources such as reports on the luxury

industry, leather goods and luggage industry, brand power, etc.

In the first section ‘The luxury leather goods industry’ the scope of the industry is defined

and key figures of the industry are provided. In the second section ‘Macroeconomic environment

shaping the business landscape for the luxury leather goods industry’ there is an overview of the

overall environment in the industry along the six areas considered in the PESTEL analysisis. In

section three ‘Competitive analysis’ the market structure, key players and industry dynamics are

observed. In section four ‘Demand and supply of luxury leather goods’ aspects of the demand and

supply are touched on. Finally on section five ‘Consumers and consumer trends-who are they?

what do they want? why do they buy?’ a description of the luxury consumers and there

motivations, as well as changes in consumer preferences are explained.


2

II. THE LUXURY LEATHER GOODS INDUSTRY

First and foremost, to realize this industry analysis it is important to define what the luxury

leather goods industry encompasses. Now a days, you can find luxury products across a number of

industries, making it very difficult to accurately estimate the value of the total luxury market and

any of its specific sectors. Furthermore, the concept of luxury is subjective. For some luxury relys

on superior quality, for some premium-price and for others brand image, thus leading to

discrepancys among different sources. However, in general, reports consider a combination of

these elements to determine the value of the different categories; according to Euromonitor1 the

categories which comprise the luxury market are: Designer Clothing and Footwear, Luxury

Accessories, Luxury Jewellery and Timepieces, Luxury Travel Goods, Luxury Tobacco, Fine

Wines/ Champagne and Spirits, Super-premium Beauty and Personal Care, Luxury Fine China

and Crystal Ware, Luxury Writing Instruments and Stationery and Luxury Electronic Gadgets.

“Once relegated to second-class fashion status, accessories now share the spotlight with

apparel designs.”2 Leather goods make a significant part of the accessories industry alongside

footwear, hosiery, gloves, hats, scarves, ties, shawls, scarves, handkerchiefs, wallets, suspenders,

eyewear and hair ornaments. However, leather goods comprise most of the category, with products

such as handbags, luggage, wallets and belts typically made out of leather.

1 Euromonitor International (2011), How Global is the Global Luxury Goods Market. May 2011

2 Diamond, J. and Diamond, E., The World Of Fashion, , Fairchild Books, Inc. New York, 4th Edition, 2008


3

KEY FIGURES

The value of the global personal luxury goods market was reported at €191 billion for 2011 by

Bain & Co. up 10% from the previous year3. In the same report luxury leather goods are estimated

at €28 billion for 2011 (Exhibit 1 & 2). Luxury leather goods is a rapidly growing category, with a

16% growth from 2010 to 2011.

The leather goods category is at times also grouped with luggage, with bags, wallets and

purses accounting for 57.1% of the global luggage and leather goods market in 2009 according to

Datamonitor4. Further information of sales shares by geographic area are presented in the table 1.

Data for the luggage and leather goods market from 2009 and more current numbers for the global

personal luxury goods market in 2011 are presente. Although placed in the same table, the idea is

not to compare them as the information is not precisely comparable, but to form an idea of how

luxury leather goods sales take place globally.

Table 1- Sale Shares By Geographic Area

Global Luggage And Leather

Goods Market Segmentation

% Share By Value In 2009

Global Personal Luxury

Goods Market Segmentation

% By Value In 2011

Americas 52.3% 30.0%

Europe 24.0% 36.0%

Asia-Pacific 23.8% 29.0%

Rest of the World - 5.0%

Source: Self-elaborated

As can be observed from the table, Europe and Americas are the most important markets for

luxury, however, Europe and the U.S. are mature markets which limits the possibilities of growth

in the markets. On the other hand, we can observe Asia-Pacific has experienced a boom in luxury

consumption.

3 Claudia D’Arpizio, Altagamma 2011 Worldwide Markets Monitor. Bain & Company and Fondazione Altagamma.

October 2011 4 Datamonitor, Industry Profile: Global Luggage and Leather Goods. June 2010


4

III. MACROECONOMIC ENVIRONMENT SHAPING THE BUSINESS LANDSCAPE

FOR THE LUXURY LEATHER GOODS INDUSTRY

Overall luxury is a thriving industry, now recovering from the economic crisis of the past

years. Starting in 2008, the global macroeconomic downturn lead to low consumer confidence and

change in consuption patterns, affecting the luxury goods market. The year 2009 proved to be a

specially difficult year when the luxury industry value plummeted to €153 billion, down from

€170 billion in 2007. However, 2010 was a rebound year with a growth of 13% driven by

emerging markets, especially China, and 2011 brought an additional 10% growth bringing the

industry up to €191 billion, an all time high for the personal luxury goods market.

PESTEL ANALYSIS

In the following PESTEL analysis we go into details of the macroeconomic environment

shapping the luxury leather goods market. Although PESTEL analysis usually are focused in a

specific country and industry, the following analysis attempts to highlight the most relevant global

factors since most of the information concerning the luxury market is in global terms, however,

there is a slight focus on the U.S. market as it remains the number one market for luxury valued at

€48.1 in 2010 according to Bain & Co.

Global economic development is tied to politics more than ever, since in the face of an

economic crisis governments throught the world had to take actions to safeguard their

economies. Politicians have had to rethink the involvement of their countries in the

economic reform. Since 2009 it was decided that the G20 group, composed of the major

economies in the world, including countries with emerging markets, would serve as the

POLITICAL FACTORS


5

board of directors on decisions concerning the global economy. It was the U.S.’s

Preseident Obama, who initiated the move to transfer responsabilities from the G8,

composed of the eight most developed countrie5, to the G20.

Politics also play a fundamental role in foreign trade, making it extremely relevant for

the luxury market whose companies are for the most part based in Europe, but depend

mainly of foreign sales. Although the U.S. and the EU are very integrated and together

account for approximately half of the global GDP and for nearly a third of world trade

flows, in recent years President Obama has rethought foreign-policy and focused on the

the Asia-Pacific region. An other element to consider when thinking about foreign-policy

is the challenge imposed by the emergence of electronic commerce which is not fully

regularized yet.

In the specific case of U.S. its political and economic importance in the global sphere have

placed it high on the list of nations susceptible to terrorist attacks. This is especially

relevant to the luxury industry since most sales depend on tourism. Chinese tourists

visiting New York and Hawaii are an especially important segment since there

consumption is growing.

The global luxury leather goods market had a reported value of €28 billion in 2011,

performing above the average.

A economic boom in emerging markets such as the BRIC6 countries, México and the

Asia-Pacific region are driving the demand for luxury goods.

5 G8- the U.S., Japan, Germany, France, Britain, Canada, Italy and Russia

6 BRCI countries- Brazil, Russia, China and India

ECONOMIC FACTORS


6

The year 2010 marked the rebound for the global personal luxury goods market, showing

the first signs of growth after the economic crisis. The year 2011 also had a double digit

growth. However, for the following years 2011-2014 the CAGR is forcasted to be of 6-7%

reaching €225- €230 billion in 2014. The recovery in sales is reflected in an increase in

brand power.

Recent steep increases in leather prices have affected companies margins. Leading to

companies rethinking their reliance in the leather goods sector.

The high taxes in the Asia-Pacific markets such as Japan and India have lead to price

differentiation and lower margins, with the companies absorbing some of the costs of

exporting the products into foreign countries rather than completely passing them on to

the customers.

Fashion and leather goods have more than practical functions, they also act as a signifier

of socio-economic class and a way of displaying individual identity and group identities,

which make clothing and accessories essential to consumers.

Brand loyalty exists, especially towards the top end of the industry since it is easier for

customers to form emotional attachements to luxury brands and luxury goods, since their

durability and elevated prices make customers think more about the purchse.

Fashion and leather good retailers can differentiate themselves quite strongly through the

styles and designs of their goods. Even un-known designers can become successful from

one collection to another due to the unpredictable nature of fashion. Products are

determined by designers, sub-cultures and are subject to sharp and unpredictable changes.

SOCIAL FACTORS


7

Increasing consumer consciousness and switch in consumer preferences, especially in

mature markets, has shifted the demand away from ostentatious consumption- affordable

luxury- and towards the high-end classics– absolute luxury.

Self-indulgance has lead the newly established middle class in the emerging markets to

sample luxury via entry-level luxury products, which work as a gateway to ‘absolute

luxury’ products. Accessories, including leather goods, are perfect for this entry-level

phenomenon.

Consumer are realizing that status can be expressed by lifestyle and experiences, rather

than by luxury goods. This has given way to an increase in the importance of the luxury

experience, mainly in-store, through additional services such as personal shoppers, etc.

experiences that offer the mid-market the chance to be treated as someone very special.

Younger consumer base, due to the fact that in emerging markets the younger population

has higher income.

Consumers are now looking for responsibly sourced luxury as they are becoming more

sensitive about sustainable development, fair-trade and environmentally friendly products.

It is important to notice that consumers are willing to pay a premium to back their values.

Companies such as Stella McCartney are pioneers in this new environment with products

marketed as 100% certified organic, natural and not tested on animals. Additionally, social

responsibility is an increasingly important dimension of wealth as there is a noticeable

link between wealth bands and philanthropy.

In terms of production technology is not a key elements, since in luxury products the

elements of craftsmanship are a key.

TECHNOLOGICAL FACTORS


8

Luxury brands, particularly within the fashion and leather goods categories, are finally

looking at online potential. Premium store environments are still key to luxury positioning

but, increasingly, websites are being used to engage customers and provide accessibility

as demand expands in emerging markets.

Leather has a considerable environmental impact as it shares responsibility for the

environmental damages caused by the meat industry and the contamination caused by the

toxins used in tanning. Since companies cannot produce their products without ‘harming’

the environment, they can counteract the damage by engaging in other Corporate Social

Responsibility activities, like charity.

Protection of ecosystems to ensure the resources necessary for production is also a concer

for companies as they are already experiencing a scarcity of quality leather hides and

struggling to keep up production, specially in the case of some exotic leathers.

Carbon footprint due to green house gas emissions during every day operations of the

business: lighting, air conditioning in stores, transport of products, etc.

The World Bank’s 2011 Doing Business report ranked the U.S. fifth with regards to ease

of doing business. The country's economic policies are generally pro-business and its

financial regulatory system is well developed, with the financial markets being open to

competition.

ENVIRONMENTAL FACTORS

LEGESLATIVE FACTORS


9

In October 2007 the U.S., the European Union, Switzerland and Japan announced that

they would negotiate a new intellectual property enforcement treaty the Anti-

Counterfeiting Trade Agreement or ACTA.

Most leather comes from developing countries such as India and China, where animal

welfare laws are either non-existent or not enforced.

The legal environment and regulation in the Asia-Pacific region are very strict and limit

the way brands can enter the markets, as well as increasing the costs of operation through

regulations concerning taxation.

IV. COMPETITIVE ANALYSIS

The luxury leather goods sector is competitive because of the large number of competitors

in the market. All though not all major players were originally focused on leather goods and

accessories, the great economic appeal of the luxury leather goods sector, which generally

commands the highest margins, has lead most high-end fashion brands to expanded their their

product lines to include fashion accessories. As can be seen from a report from Fondazione

Altagamma7 leather goods perform over the average and are the most represented firms in the top

ten performers according to EBIT margin, with companies sucha as Coach, Hermès, Prada and

Tod’s making the ranking. The average ROI for leather goods companies was 17.7% in 2010,

making it the best performing category both in terms of sales growth and profitability.

7 Armando Branchini, A. and Varacca Capello, P. (2011), Fashion & Luxury Insight FY 2010 Results. Fondazione

Altagamma and SDA Bocconi, October 2011.

http://www.peta.org/issues/animals-used-for-clothing/global-leather-trade.aspx


10

MARKET STRUCTURE

Competition in the leather goods market is far from perfect competition as products in the

category are greatly differentiated in many ways such as, type of product (handbags, wallets, belts,

etc.), brand, price and design. Differences among sellers also exist as firms differ in size, with an

obvious difference between the size of conglomerates and single-brand companies. Other

differences arise in terms of production costs derived from the origin and quality of inputs used

and the level of craftsmanship the products confer. Additionally, in the luxury leather goods

sectors brand image is a key differentiating factor amongst firms, since it is a crucial element in

their ability to command premium-prices from consumers.

KEY INDUSTRY PLAYERS

Since the late 1980’s the fashion apparel and accessories industries have increasingly

become more and more concentrated due to the formation of luxury conglomerates. Todays

competitive environment is determined by strong competition at brand level with the top 5 brands

accounting for 21% of the total personal luxury goods market in 2010, leading to the increasing

concentration of the industry with conglomerates fighting to have a wide array of brands in the

hopes of cautivating a broader range of consumers. In 2010, the top 5 luxury groups accounted for

35% of the total personal luxury goods market according to the Bain & Co. report. The drive for

consolidation is further supported by the finding in the Fondazione Altagamma report which

clearly show the financial benefits of size. In 2010, companies with an average size of €5 billion

or more proved to be the most profitable in according to their EBIT margin and ROI as well as

having a better cash flow than their smaller competitors. Risk is also something to take into


11

account, since size gave bigger companies better financial estability, a very important factor to

ride out the crisis and thrive in the current favorable yet still volatile post-recession environment.

Thus, in understanding the industry it is important to begin with the identification of multi-

brand players and single-brand players, as well as categorizing brands according to their core

business, separating those whose core business is apparel from those mainly in the leather goods

business, and finally, it is important to classify brands depending on the “level” of luxury, which

mainly depends on the craftsmanship and exclusivity. This typology allows us to identify where

the added value of every particular brand lays. It is also important to understand the importance of

the brands’ heritage and story when it comes to luxury brands, as it is an intrinsic part of the brand

image.

As previously mentioned, we will see that there is various players at the brand level. Even

though several of them belong to the same luxury groups, since in the luxury industry the brand is

such an important element of differentiation and value for customers, generally brands are

managed independently to respect the brand identity. Thus, we must identify them as separate

players. It is important to mention, that al though Richemont is the second largest luxury group in

the personal luxury goods market, it is not a strong player in the luxury leather goods sector since

it only participates with Lancel, which has been struggling to position itself as a luxury brand.


12

Table 2- Key Industry Players At Brand Level


Company Brand Core Business- Origial

Bussines

Craftsmanship

& Exclusivity

Country

And Year

Of Origin

LVMH Moët

Hennessy Louis

Vuitton SA

Louis Vuitton Leather Goods- Luggage ** France

1854

Loewe Leather Goods- Leather

specialist

*** Spain

1846

Marc Jacobs Fashion- R-T-W ** U.S.

1986

Fendi Leather Goods- Handbags *** Italy

1925

Gucci Group NV

Subsidary of PPR

Gucci Leather Goods- Leather

specialist

** Italy

1921

Bottega Veneta Leather Goods- Leather

specialist

*** Italy

1966

YSL Fashion- R-T-W ** France

1961

Balenciaga Fashion- Couture *** Spain

1919

PRADA S.p.A. Prada Leather Goods- Leather

specialist

** Italy

1913

Miu Miu Fashion- R-T-W ** Italy

1993

Hermès

International

Hermès Leather Goods- Saddles *** France

1837

Valentino

Fashion Group

S.p.A.

Valentino Fashion- Couture * Italy

1960

Chanel S.A. Chanel Fashion- Haute couture ** France

1909

Burberry Group

Plc

Burberry Fashion- Gabardine * UK

1856

Christian Dior Christian Dior Fashion- Haute couture ** France

1946

Salvatore

Ferragamo

S.p.A.

Salvatore

Ferragamo

Fashion- Shoes *** Italy

1927

Mulberry Group

Plc

Mulberry Leather Goods- Leather

specialist

* UK

1971

Richemont

Luxury Group

Limited

Lancel Leather Goods- Leather

specialist

* France

1876


13

According to the 2011 BrandZ Top 100 Most Valuable Global Brands8 report Louis

Vuitton placed at spot no.26 with a brand value of USD$24,312- up 23% from its brand value in

2010- making Louis Vuitton the most valuable luxury brand. It is later followed by Hermès, which

placed at spot no.71 with a brand value of USD$11,917- up 41% from 2010. Allthough it is

important to realize that the brand value of the luxury sector is still 13% under its pre-recession

value in 2008, it is promising to see customers are once more turning to luxury brands. As can be

seeb in the case of Burberry who had a brand value appreciation of 86% from 2010 to 2011,

placing its brand value at USD$3,379.

According to this same report Louis Vuitton, Hermés, Chanel and Gucci where amongst

the Top 15 brand contribution leaders- brand values reported for Chanel and Gucci are of

USD$6,823 and USD$7,449 respecyively. Brand contribution measure the emotional bond of

consumers to the brands, thus luxury brands typically rank high due to their heritage,

craftsmanship and exclusivity which customers highly appreciate (Exhibit 3).

The previous table provides an overview of the industrys’ key players at brand level,

however, further financial analysis is not always possible at such level since not all luxury groups

dissclose the financial information at brand level, and rather reports are presented for the entire

group. It is also important to note that many companies present results for ‘fashion apparel and

accessories’ which include additional brands to those previously mentioned and not included due

to their lack of relevance in the luxury leather goods sector. Finally, when comparing data from

the companies it is to be taken into account tha the last available annual reports where considered

for each company, 2010 or 2011, so there is a discrepancy in years for some of the companies, and

in currency since british brands report their financial information in pounds.

8 MillwardBrown, BrandZ Top 100 Most Valuable Global Brands. 2011


14

Table 3- Key Industry Players At Group Level

Company Key Facts Market

Share

LVMH Moët

Hennessy

Louis

Vuitton SA

• Total revenues: €20,320m in 2010

• Fashion & Leather Goods revenues: €7,581m in 2010

• Distributer & Retailer

• Directly-Operated Stores: 2545

• CEO Bernard Arnault

• 83,542 employees

• Activities: Manufacturing & Selling

38.43%

Gucci Group

NV

Subsidary of

PPR


• Leather Goods revenues: €2,033m in 2010



• CEO Robert Polet (CEO of PPR François-Henri Pinault)



10.31%

PRADA

S.p.A.


• Leather Goods revenues: €1,014m in 2010


• Directly-Operated Stores: 319 (Franchises: 33)

• CEO Patrizio Bertelli (Chairwoman Miuccia Prada Bianchi)

• 7,199 employees


5.14%

Hermès

International


• Leather Goods-Saddlery revenues: €1,205m in 2010

• Retailer (Distribution of watches, perfumes and tableware)

• Directly-Operated Stores: 317 (Concessionaires: 21)

• CEO Patrick Thomas

• 8,366 employees


6.11%

Valentino

Fashion

Group S.p.A.

• Valentino revenues: €300m in 2011


• Directly-Operated Stores: 112 (Single-brand boutiques: 700)

• CEO Stefano Sassi

• 626 employees


1.52%

Chanel S.A. • Total revenues: estimated at €3,000m in 2011



• CEO Maureen Chiquet (Chairman Alain Wertheimer)

• 1,270 employees


15.21%


15


It is important to highlight that the majority of the key industry players are publicly traded

companies, since it is through this source of financing that most of the companies have been able

to finance their global expansions. Perhaps the only exceptions that remain are Chanel and

Valentino Fashion Group. Although the majority of the aforementioned companies are of

Company Key Facts

Market

Share

Burberry

Group Plc

• Total revenues: £1,501m in 2011

• Non-apparel: £563m in 2011


• Directly-Operated Stores: 174 (Concessionaires: 199 & Outlets:44)

• CEO Angela Ahrendts

• 6,681employees


3.44%

Christian

Dior


• Fashion & Leather Goods: €2,555m in 2010



• CEO Sidney Toledano (Chairman Bernard Arnault)



12.95%

Salvatore

Ferragamo

S.p.A.


• Leather Goods revenues: €244m in 2010



• CEO Michele Norsa (Chairman Ferruccio Ferragamo)

• 2,745 employees


1.24%

Mulberry

Group Plc

• Total revenues: £122m in 2010



• CEO Godfrey Davis

• 821 employees


0.75%

Richemont

Luxury

Group

Limited


• Other Businesses revenues: €967m in 2011


• Directly-Operated Stores: 246 (Only Lancel)

• CEO Johann Rupert



4.90%


16

European origin- especially France and Italy, countries typically known for their luxury products-

they now all compete at a global scale both in mature and emerging markets. Therefore, the

market shares mentioned on the previous table are in global terms. However, it is important to

consider that the market shares calculated above are just an estimate since not all the revenues

were exactly comperable due to differences in years, currency and categories. To calculate the

market share currencies in pounds were converted to euros at the current exchange rate of

1.20489032 euros per pound and the subcategories of fashion and leather goods or the likes,

depending on the companies way of classifying, were considered whenever possible- in some

cases only a total revenu was available or a total revenue per brand.

THE FIVE FORCES MODEL

The ‘Five Forces’ analysis, suggested by Porter, offers a a holistic view on the competitive

dynamics of the industry and helps us identify where profits are being allocated. The model is also

helpful in further understanding the impact of the macroeconomic environment on companies

strategy and interactions, by pointing out the underlying drivers in each of the forces.

In the case of luxury products, and certainly luxury leather goods, the quality of raw

material is of the utmost importance as it has an impact in the feel of the finall product. Given this,

luxury brands have always recognized the importance of stablishing long-term relationships with

reliable suppliers offering the highest quality materials. These relationships are managed in such a

way that suppliers are generally locked-in to the relationships by having high switching costs.

Furthermore, many brands have looked for vertical integration by investing in supplier companies

BARGAINING POWER OF SUPPLIER


17

or setting up their own farms for leather production, specially in the case of exotic leathers which

are scarce. Additionally, leather suppliers are generally not organized to reach final consumers in

terms of final product, branding and distribution, thus, they depend on luxury brands buying their

leather hides. Although scarcity has perhaps increased suppliers bargaining power, overall there is

a low supplier power in the luxury leather goods market.

When considering the bargaining power of buyers, the brand loyalty individual consumers have

towards the specific brands is key to determine which party has the most influence. Since most up-

scale department stores and e-stores, such as Saks Fifth Avenue, Neiman Marcus, Barneys,

Harrods, Selfridges, Net-A-Porter, etc. are quite known on their own they are powerful channels

for up-and-coming designers to display their products supported by stores customers recognize as

luxurious and fashionable. However, in the case of established brands, such as the ones mentioned

in the key players section, loyalty tends to be towards the brand and not the store, allocating the

bargaining power with the brands. Furthermore, not carring certain luxury brands customers

expect weakens the stores’ image.

Additionally, luxury brands have become for the most part expert retailers themselves with

flagship stores and directly-operated boutiques worldwide meaning they do not rely soley on

wholesalers to distribute and sell their products. However, department stores in emerging markets

where brands are still to set their own operations may hold a higher bargaining power, but overall

buyers bargaining power is moderate.

Finally, when talking about directly-operated stores we must talk about individual

consumers as the buyers. In this case, bargaining power is also moderate as most clients have

BARGAINING POWER OF BUYERS


18

emotional attachements to their preferred brands. Moreover, although customers do not incur in

switching costs from buying different brands, designs and brand positioning are differentiated

enough that customers may find it difficult to switch brands. Therefore, as a whole customers

always hold some bargaining power since they drive demand, but as no individual customer

represents a considerable wallet-share the bargaining power on individual customers is moderate.

Luxury leather goods consumption is driven by self-indulgence, meaning that potentially

any good or service may pose as a substitute as long as it covers this need for self-gratification and

pampering. Therefore, some of the most obvious substitutes are other products from the

accessories category, but substitutes may also come from categories such as jewelry and watches,

parfumes and apparel amongst other categories. Additionally, luxury leather goods, although

mainly purchased for their brand and aesthetics, also have a functionality element and therefore

may be substituted by products which meet this requirement. Specially after the crisis, some

potential customers remain price-sensitive and therefore may opt to substitute luxury leather goods

for their more affordable counterparts. However, it is important to mention that generally luxury

leather goods are considered durable goods, as opposed to their cheap counter parts which are

considered non-durable goods.

On the other hand, there are also customers who are unwilling to give-up luxury brands but

opt to consume or purchase them in an different way. Vintage and second-hand products, typically

sold by specialty stores or by individual owners through sites such as eBay pose a threat due to

their lower cost. Another threat is the rental of luxury handbags, which allows consumers to access

the dream and prestige of wearing a luxury handbag without having to purchase it.

THREAT OF SUBSTITUTE GOODS


19

Finally, counterfeit represents the biggest threat for all of the luxury sector, of which

leather goods is the most affected since handbags and wallets are amongst the most reproduced

products. Counterfeit is one of the most concerning challenges the industry poses for companies

and constant attempts at fighting it are carried on. Luxury groups, such as LVMH now have

special departments dedicated to fighting counterfeit or fight it to some extent through their legal

departments. Furthermore, organizations such as the Comité Colbert (France), Fondazione

Altagamma (Italy), Walpole (UK) and Circulo del Lujo Español (Spain), of which the luxury

brands are members, constantly work on fighting counterfeit through ad campaigns informing the

general public about it and the hefty fines due if cought with counterfeit products.

Efforts to counteract counterfeit have been paying-off as more and more countries actively

play a role in confiscating and destroying counterfeit products at the border, including China

whose government is making the first attempt to combat counterfeit. However, the damages

derived from counterfeit go beyond the mere economic impact since there is also an image

element. In luxury products scarcity and quality are indispensable to achieve the desired brand

image and counterfeit products, specially the higher-end copies, deteriorate brand image since

customers might confuse them with the real products. Overall, the threat of substitutes is high due

to counterfeit, since the previously mentioned substitutes only pose a moderate threat.

In the luxury leather goods industry, new designer are constantly entering the scene since all

it takes is a popular design paired with a celebrity endorsement for customers to desire the

product. Moreover, it is possible for new designers to enter the industry on a small scale with a

relatively small capital investment. On the other hand, heritage and brand positioning serve as

THREAT OF NEW ENTRANTS


20

entry barriers since achieveing a brand image comparable to that of established luxury brands

requires extensive investments on communication and media planning, as well as time for

customers to accept the brand and form emotional attachements to it. Additionally, the element of

heritage is impossible to replicate in the short-term.

Additionally, the industrys’ consolidation trend leads luxury groups to buy independent

brands which they consider to have potential and therefore pose a future threat. Consolidation has

also lead to the formation of additional entry barriers derived from scale and bargaining power,

sucha as economies of scale as some of the cost can be shared amongst firms and a privileged

position in terms of supply of raw materials and in distribution channels. Overall, although it is

easy for new entrants to enter the market, the threat of new entrants is considered low since it

takes a considerably long period of time for brands to position themselves as luxury brands and

truly compete at the level of the key players in the industry.

The luxury leather goods market is highly consolidated at company level, however, at

brand level it is fragmented as there exists a wide array of brands ranging in size, design, heritage

and positioning. Brands are typically managed as independent companies to maintain their

creative control and brand DNA, therefore, brands tend to target specific customers. Furthermore,

brand loyalty tends to be strong despite the low switching costs for customers, which is why

luxury groups tend to focus on having an extensive brand portfolio covering different customer

segments. Overall, there is many brands in the luxury leather goods market yet the level of rivalry

is moderate since brands are, in a way, considered niche and therefore compete for different

customers.

RIVALRY AMONG EXISTING COMPETITORS


21

INDUSTRY DYNAMICS & INTERACTION AMONGST PLAYERS

The personal luxury goods industry is characterised by its dynamism, with well-established

brands constantly finding competition from new players. New brands and recognized designers are

constantly popping into the scene due to one key element: creativity. Thus, there is little

concentration at brand level in the industry. An other trend that has made the industry extremely

dynamic since the 1980’s when the consolidation process began, headed by Bernard Arnault, is

the revival of classic brands, which conglomerates often covet due to the potential value of the

brand names. The key to the revival of these brands has also been linked to creativity, finding the

right designer to exhalt the brands aesthetics in a contemporary way. Examples of such brands

include Christian Dior which revived thanks to John Galliano, Gucci during the Tom Ford period

and Chanel under Karl Lagerfeld. Finally, one last trend in the dynamics of the industry players is

the constant acquisition of brands by the conglomerates. In their desire to maintain there positions

as key players, conglomerates are constantly seeking to purchase or sell brands in order to build

portfolios which enhance their position and profitability. The perfect example of this is LVMH,

whose CEO Bernard Arnault earnd the nickname “wolf in cashmere clothing” due to his hostile

takeovers, of which perhaps only Gucci has been able to escape back in 2001. Currently, LVMH is

at it again, recently purchasing a stake in Hermès. This action quickly raised speculations about an

eventual bid for the entire company, prompting Hermès family members to look for court

protection by permitting their plans to create a holding company that will ensure the families

position in the company for the next 20 years.

Finally and foremost, the fashion and leather goods sector is dynamic in nature due to the

rapidly evolving consumer trends which require brands to keep up-to-date and offer new designs

each season. Especially, in the leather goods sector the “It Bag” phenomena ruled for at least the


22

past decade making competition extremely dynamic since each season the most desired bag would

be from a different brand or designer. Furthermore, luxury brands have realized that nowadays

creativity most expand beyond the runway collections in order to keep the brand image up-to-date

and continue to engage customers, therefore, driving for an even more dynamic and changing

environment. Not so long ago Internet was condoned by luxury brands, now it is one of the arenas

in which brands compete for customers attention. Some of the highlights of the industry’s efforts

to utilize new technologies are Louis Vuitton’s London fashion show broadcast on YouTube and

Chanel’s entrance into e-commerce.

V. DEMAND AND SUPPLY OF LUXURY LEATHER GOODS

Luxury brands have always been amongst the most coveted, however, scarcity and

exclusivity are intrinsic to luxury- so how can companies appropriately balance customers demand

and brands’ supply? On the demand side, companies are constantly investing millions of euros in

marketing and public relations to ensure their brands are desired and valued by the consumer, yet,

companies must be careful to attract the right consumers at the right price-point. Although, luxury

leather goods are amongst the most highly priced due to the margins they command, it is still

important to recognize that the democratization of luxury has increased the demand for luxury

leather goods as it is now possible for the aspitrational middle-class to purchase luxury brands.

Thus, on the supply side companies find themselves in the dilemma of reaping profits by fully

meeting the customers demand and offering more ‘accessible luxury’ and ‘aspirational luxury’

goods or concentrating on ‘absolute luxury’ goods and holding back supply in order to maintain an

image of exclusivity.


23

SUPPLY OF LUXURY LEATHER GOODS

The supply of luxury leather goods in 2011 was marked by further price increases lead by

further increases in costs due to the high costs of leather, as well, as by increases in strains to the

supply due to additional demand as consumers recover from the economic downturn of the past

years and preferences shift towards luxury products due to their durability. In terms of leather

good supplies a very important element to take into account is the scarcity of quality leather hides,

both of cattlehide and exotic leathers such as crocodile, snake and ostrich amongst others. This

scarcity of raw materials specially affects luxury brands since they are always looking for the best

quality. For example, Hermès has resorted to running its own crocodile farms in an effort to better

meet the demand of their customers who are already forced to wait for years for certain exotic-

leather bags. An other example is Louis Vuitton who recently bought a 51% majority stake in

Heng Long, a crocodile leather supplier- the acquisition is valued at €92 million. Supply for the

likes of Hermès and Louis Vuitton is also limited by labour, since craftmanship not only makes for

a slower production process but also requires highly skilled individuals and a long training

process.

An other aspect of luxury leather goods supply is that of the channels through which they are

distributed. Leather goods are distributed through department stores, specialty stores, flagship and

directly-operated stores and online. In general, retail oriented companies performed better as

retailing allows companies to take better control of their growth and image. It is also important to

take into account new consumer trends which place importance in the shopping experience rather

than just the product, thus making flagship and directly-operated stores increasingly attractive.

Luxury distribution has undergone a significant shift, with the retail channel growing faster

than the wholesale channel, with a 14% growth from 2010 to 2011 according to Bain & Co.


24

Moreover, the instability of department stores due to banckruptcies, extrem discounting policies

and unreliable stocking cycles in key markets- US and Japan- has impacted both the sales and

image of the brands damaging the business-to-business relationships between the brands and

wholesalers, leading many brands to tighten their distribution controls. Nowaday the retail channel

accounts for 28% of the personal luxury goods market worldwide. However, even though retail is

over-performing wholesale, the gap is narrowing, since wholesaling remains vital for brands to

reach costumers in international booming markets. The importance of the wholesale channel is

further supported by a report realized by Bain & Co. in cooperation with VOGUE9 which found

that women buying luxury goods have a preference for shopping in luxury department stores and

on online flash sales. Online is also a relevant channel accounting for 3% of total sales in the

personal luxury goods market. Although most luxury brands have finally embraced the online

channel, multi-brand sites remain as the preferred customer websites due mainly to the excellent

service level and discounts. It is also worth pointing out that the online channel is particularly

relevant to the accessories segment, including leather goods, due to the ‘one size fits all’ nature of

the products.

DEMAND OF LUXURY LEATHER GOODS

The demand of luxury leather goods was marked by an increase in the demand, proving

that overall the luxury market is always amongst the most resilient in economic downturns. This

increase in demand can be attributed mainly to two sources: first the booming emerging markets

and changing consumer trends.

In relation to the booming emerging markets we must first and foremost talk about the BRIC

9 Bain & Company in cooperation with VOGUE, Why She Shops:The 2010 Fashion and Beauty Study. September

2010


25

countries, it is also important to mention that Mexico is many times considered along the BRIC

countries as an important emerging market, as are most of Asia-Pacific countries. However, when

talking about emerging markets, China is the most important country as it has emerged as an

example for all emerging markets in terms of penetration and localized value proposition. It is also

forcasted to remain as the fastest growing market for luxury, becoming the number one luxury

market in the next 5 years.

In the case of consumer trends, the extent of the impact of the recession on consumers values

is yet to be known, however there is already a notorious shift in preferences which have led to an

increase in the demand of luxury products, but also changed the buying patterns of consumers.

Further analysis about consumer trends is discussed in the following section as it is vital to

understand who are the consumers in order to have a further understanding of the demand of

luxury leather goods and services.

VI. CONSUMERS AND CONSUMER TRENDS-WHO ARE THEY? WHAT DO THEY

WANT? WHY DO THEY BUY?

Luxury can be divided into ‘absolute luxury’, ‘aspirational luxury’ and ‘accessible luxury’

and each of these categories attends to a different customer segment. ‘Absolute luxury’ is aimed at

the High Net Worth Individuals mainly in mature markets, ‘aspirational luxury’ and ‘accessible

luxury’ are aimed at the middle class mainly in emerging markets where the purchasing power of

people is increasing, especially in the younger age group. The main difference amongst the

customer base for ‘aspirational luxury’ and ‘accessible luxury’ is in terms of willingness to pay

due to price-sensitivity and interest in fashion and accessories. The different classifications of

consumers are shown in the following image.


26

Image 1- Segments Of Consumers In Terms Of Style And Price-Point

Bain & Company in cooperation with VOGUE (2010), Why She Shops:The 2010 Fashion and

Beauty Study.

For luxury products the most interesting segments are fashion mavens and classic

professional, since they spend the most across all categories. There spending in accessories is of

19% and 20% accordingly. It is also important to note that their average age is of 33 for fashion

mavens and 44 for classic professional. These luxury shoppers are unique in terms of what they

look for.

Todays’ style-conscious woman is mainly seeking quality and lasting value, with 80%

willing to pay more for accessories that will last more than one season, leading to marked

preference towards classic brands. According to Bain & Co. and VOGUE, in 2010, 65% of the

sales were of classic brands. Additionally, customers also seek for heritage with 60% of style-


27

conscious women willing to pay extra for brands with a strong heritage. It is also important to note

that 30% of Americans, Europeans, and Japanese say they are most likely to pay full price for an

item that is classic, since products that can never be bought on discount, are more valuable,

durable, and a good investment. In China, more than 50% of luxury goods consumers said that the

more expensive the product, the better they consider its quality also favoring the purchase of the

higher-end artisanal products. However, many analysts belief that the large luxury goods

companies cannot afford to rely on the High Net Worth Individuals consumers, who should be left

to the smaller brands of true artisanal luxury, such as Hermès and Bottega Veneta, specially with

more than 40% of Americans and almost a third of Europeans, only willing to buy luxury goods

only when they are on sale. Another trend is the growing desire for ‘Ecolux’ due to the consumers

desire for responsible and guilt free shopping, with 30% of style-conscious women willing to pay

extra for products based on sustainability, although by definition the leather goods industry can

not be green luxury companies can otherwise contribute to society to help make consumers feel

‘guilty-free’ when purchsing luxury leather goods. Finally, concerning male customers there is a

marked trend, especially in Asia, of increasing men spending in leather goods.

When talking about leather goods, undoubtedly, the main product category is handbags since

the ‘it bag’ phenomenon started. Although this phenomenon is now coming to an end as women

opt for the classics, the interest of women in handbags remains, as part of the ‘self-rewarding’

phenomenon. Today’s consumers often opt to forgo costly apparel purchases and instead choose

accessories that serve both functional and decorative purposes and are easy to buy due to the ‘one

size fits all’ factor.

One of the main issues the luxury industry is facing right now is the shift in consumer

behaviour patterns due to a change in preferences as a consequence of the recession. This is why


28

understanding where luxury sales are made and what people in each market look for is important.

The following image shows the geographic mix of global luxury goods sales in 2010.

Image 2- Geographic Mix Of Global Luxury Goods Value Sales, % Share 2010

Euromonitor International (2011), How Global is the Global Luxury Goods Market.

Consumer motivations for buying luxury products are often linked to their social, political

and economical environments. However, we can generalize that the ‘desire for the exceptional’

has become a trend amongst the luxury buying consumers. With luxury purchases becoming more

deliberate, consumers expect more made-to-measure products and services tailored to their

specific needs.

VII. CONCLUSION

Luxury goods typically are inelastic since luxury goods consumers are typically not very

price sensitive. However, the economic crisis of the last few years was the tipping point for several

changes in consumer preferences and the competitive landscape. Today, consumers are less

interested in purchasing luxury goods as status symbols and more focused on the actual value of


29

the product. Therefore, companies that can play up their heritage and craftsmanship should

highlight it, since it is this element of uniqueness that allows the brands to command higher prices

and make the product unsusbtitutable in the consumers mind. Overall demand for luxury leather

goods will continue to increase, it is up to the brands to rethink there strategies in order to satisfy

this new consumer trend. Furthermore, this trend has brought about the end of the ‘it bag’

phenomena, which led women to seek the ultimate bag of the season and forced them to purchase

a new bag each season. As we know leather scarcity has put a strain on the supply of final leather

goods manufactured by the brands, therefore, the end of this trend or phenomena might also be

beneficial for the brands if they adequately change there business strategies to remain profitable.

With this change the gap between supply and demand is reduced in terms of volume but not

necessarily value since consumer are also willing to buy at a higher price-point.


30

VIII. REFERENCES

Armando Branchini, A. and Varacca Capello, P. (2011), Fashion & Luxury Insight FY

2010 Results. Fondazione Altagamma and SDA Bocconi, October 2011.

Atsmon, Y., Pinsent, D. and Sun, L., Consumer & Shopper Insights: Five Trends That Will

Shape the Global Luxury Market. McKinsey & Company. December 2010

Bain & Company, Worldwide luxury goods market poised to surge 10 percent in 2011 as

growth in China and mature markets increases, according to newly-released 10th edition

of Bain & Company's luxury goods worldwide market study. October 2011

http://www.bain.com/about/press/press-releases/worldwide-luxury-goods-market-poised-

to-surge-ten-percent-in-2011.aspx

Bain & Company in cooperation with VOGUE, Why She Shops:The 2010 Fashion and

Beauty Study. September 2010

Bellaiche, J., Mei-Pochtler, A. and Hanisch, D., The New World of Luxury: Caught

Between Growing Momentum and Lasting Change. The Boston Consulting Group.

December 2010.

Burberry Annual Reort 2011

http://201011.annualreport.burberry.com/projet/multimedia/files/Full%5Fannual%5Freport

%2Epdf

China Daily, G20 Leaders Push Global Economic Reforms Friday. September 2009

http://www.chinadaily.com.cn/world/2009-09/25/content_8738147.htm

Claudia D’Arpizio, Altagamma 2011 Worldwide Markets Monitor. Bain & Company and

Fondazione Altagamma. October 2011

Comité Colbert, Luxury: A Growth Driver For 21st-Century Europe. December 2008

Christian Dior Consolidated Highlights 2010

http://www.dior-finance.com/en/etats_financiers_conso.asp

Datamonitor, Industry Profile: Global Apparel, Accessories & Luxury Goods. April 2011

Datamonitor, Industry Profile: Global Luggage and Leather Goods. June 2010

David Jones, Hermes breeds own crocs to meet bag demand, Reuters. June 2009

http://www.reuters.com/article/2009/06/08/us-luxury-summit-hermes-crocodiles-

idUSTRE5573QI20090608

Diamond, J. and Diamond, E., The World Of Fashion, , Fairchild Books, Inc. New York,

4th Edition, 2008

Euromonitor International, How Global is the Global Luxury Goods Market. May 2011

Euromonitor International, Absolute luxury rides high in recession. April 2010

Euromonitor International, Consumers express status through lifestyle choices and not just

luxury purchases. May 2010

Euromonitor International, How the “green wave” is shaping the luxury goods industry.

June 2010

Euromonitor International, Is luxury in rehab?. May 2010

Euromonitor International, Luxury brands forced to address their brand heritage to stay

afloat. May 2010

Euromonitor International, Luxury Brand Routes to Market: Exclusivity vs Expansion.

April 2011


31

Ferragamo Annual Report 2010

http://group.ferragamo.com/en/downloads/SF_Group_Consolidated_Annula_Report_IFRS

_31.12.10_draft_english_version_final_clean.pdf

Hermès Annual Report 2010

http://finance-en.hermes.com/content/download/517/3635/version/1/file/RA-

HERMES_2010_GB.pdf

Hoovers

http://subscriber.hoovers.com/H/home/index.html

Jay Diamond and Ellen Diamond, The World of Fashion, 4th

edition, Fairchild Books Inc.

New York. 2008

Jean-Marc Bellaiche, Antonella Mei-Pochtler, and Dorit Hanisch, The New World of

Luxury Caught Between Growing Momentum and Lasting Change, Boston Consulting

Group. December 2010

Lauren Sherman, World’s Most Powerful Luxury Brands. Forbes. August 2009.

http://www.forbes.com/2009/05/01/powerful-luxury-brands-lifestyle-style-luxury-

brands_print.html

MillwardBrown, BrandZ Top 100 Most Valuable Global Brands. 2011

Mimi Spencer, The It bag is dead; long live the no-logo bag. Times Online. May 2010

http://women.timesonline.co.uk/tol/life_and_style/women/fashion/article7128692.ecePPR,

Luxury Key Figures 2010.

Mulberry Annual Report 2010

http://www.mulberry.com/about/PDF/Investor/MulberryGroupPLC_AnnualReport_2011.p

df

PETA

http://www.peta.org/issues/animals-used-for-clothing/leather-industry.aspx

PPR- Gucci Group Annual Report 2010

http://www.ppr.com/sites/default/files/publications/web_PPR_RA_2010_GC_GB_0.pdf

Prada Annual Report 2010

http://www.pradagroup.com/documents/reports/2010%20Annual%20Report_PRADA%20

spa%20Group_ENG.pdf

Richemont, Annual Results FY 2011.

http://www.richemont.com/investor-relations/results-presentations.html#

WWD: Women's Wear Daily, Valentino Swings To Profit, EBSCO Host. September 2011

http://web.ebscohost.com/ehost/detail?vid=4&hid=12&sid=1b1b3ec1-5194-4041-9279-

4a876e31b158%40sessionmgr113&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bu

h&AN=65486785

http://www.forbes.com/2009/05/01/powerful-luxury-brands-lifestyle-style-luxury-brands_print.html

http://www.forbes.com/2009/05/01/powerful-luxury-brands-lifestyle-style-luxury-brands_print.html

http://www.richemont.com/investor-relations/results-presentations.html


1

IX. APPENDIX

Exhibit 1- Worldwide Personal Luxury Goods Market Trend (1995-2011E, €B)

Source: Claudia D’Arpizio, Altagamma 2011 Worldwide Markets Monitor. Bain & Company and


Exhibit 2- Value Of Luxury Leather Goods (2009-2011E, €B)

Source: Claudia D’Arpizio, Altagamma 2011 Worldwide Markets Monitor. Bain & Company and



2

Exhibit 3- Top Luxury Brands

Source: MillwardBrown, BrandZ Top 100 Most Valuable Global Brands. 2011

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