How Luxury Brands Mastered the Art of Growth

Luxury goods brands face a rare paradox: How can a company realize consistent growth selling products that require an aura of both scarcity and desirability? As it turns out, the strategies that successful luxury brands employ may be as artistic as the products themselves.

“Luxury is one of the only sectors where growth creates a problem for market participants," says Edouard Aubin, who heads up the Luxury Goods team at Morgan Stanley Research. “It can lead to a loss of cachet and desirability."

This growth paradox for luxury brands is nothing new. Early in his career 20 years ago, Aubin questioned how one luxury goods maker could maintain its prestige, even as its handbags were ubiquitous among well-to-do Japanese women. Yet, that company is now the largest luxury brand in the world, with sales of more than a 9.5% compound annual growth rate (CAGR) since 1998. It even managed to retain pricing power during the global financial crisis.

That brand’s success has inspired other luxury names to borrow from its playbook to achieve the same delicate balance of growth and exclusivity. In a recent report, Aubin and his colleagues deconstruct the luxury segment to understand the common traits and strategies deployed by leading brands. Here's a look behind the velvet rope.

Broadly speaking, the industry could be separated into luxury conglomerates—the multibrands with several prestigious “houses”—and monobrands. In recent years, the conglomerates have captured an increasing share of the luxury goods industry growth, all the while maintaining brand equity and gradually increasing prices.

In 2017, for example, the two largest brands grew their sales by roughly 12%—about twice as much as the personal luxury goods market overall. According to the report, the higher growth of megabrands isn’t a coincidence. These brands attract the best talent, commission top artists and architects, keep tight control of distribution and consistently implement strategies that build brand value over time. They also imply a constant association with art.

Art may be in the eye of the beholder—and virtually impossible to quantify—but it is a key part of the luxury brand strategy. “Associating with art, either directly or indirectly, is what allows a brand to elevate itself and circumvent the volume problem," says Aubin.

Indeed, the most enduring brands tend to have their own art foundations or museums, sponsor or organize exhibitions, and commission renowned architects to design flagship stores. Perhaps most importantly, they embrace collaboration, be it with artists, outside designers or other brands.

These strategies, which are costly and difficult to implement, add to a brand's allure and, because the high cost of execution, create a formidable barrier to entry for potential challengers.

The laws of economics dictate that when demand is larger than supply, prices go up. Limiting supply takes discipline, particularly for publicly traded companies, but the leading luxury brands have to, as one CEO put it, create tension in inventory on purpose “always making one too few."

One approach is to create physical scarcity of items that transcend fashion trends and, therefore, face low risk of obsolescence—a classic watch, for example. Most top luxury brands employ this model of physical scarcity, though shareholders seeking rapid growth don’t always embrace it.

As a compromise, many companies now use a strategy known as virtual scarcity—inducing "rarity" by regularly launching limited editions and “capsules" that sell out in a matter of hours, and generate media buzz in the process.

Here's where the connection to art is key: Brands can create virtual scarcity by collaborating with artists, designers and other brands, often in surprising ways. This allows luxury brands to sell more items without diluting the brand. Indeed, the pace of limited editions and capsules has accelerated in recent years.

Another lever for creating a halo of unattainability is selective distribution. “Luxury rarity is billed at retail," says Aubin. Here again, the world's largest luxury conglomerate has been the pioneer in this regard. As early as the 1970s the company—which got its start in the 19th century making stackable steamer trunks—began selling its products exclusively in its own shops, a model maintained to this day, even for such items as perfume or eyewear.

Selling directly to its customers offers many advantages. It gives a brand better control of pricing and presentation, allows for better customer experience, provides more knowledge of the end customer; and it allows the brand to capture the third-party retailer markup.

This is a far cry from the distribution strategies used by “mass-tige" brands, which in some cases garner more than half of their sales through outlets. “The leading luxury player would rather incinerate products than sell them at a discount," Aubin says.

Different brands have different strategies to better control their distribution. One Swiss watchmaker takes this to the extreme, assigning direct allocation for select watches. This requires potential buyers to provide detailed information about their watch collections and prove that they have not resold watches that they've bought from the maker in the past.

Similarly, a French fashion house with its Paris flagship on Rue Saint Honoré has months-long waiting lists for its two most coveted bags, and requires clients to check availability in their stores. “The more well-known the client is by the staff, the more likely they are to be offered the opportunity to buy one of these bags," Aubin adds, noting that these two handbag models together account for more than half the company's leather goods division sales.

To be sure, among clients for whom money is no object, the allure of a luxury item isn't just a high price tag, it's access.

For more Morgan Stanley Research on luxury brands, ask your Morgan Stanley representative or Financial Advisor for the full report, “The Art of Growth," (Sep 24, 2018). Plus, more Ideas.