Luxury Brands in Emerging Markets

A video showing a nine-year-old boy driving a Ferrari, with his seven-year-old brother in the passenger seat, went viral on YouTube.¹ It was not only the age of the driver and the irresponsibility of the parents that was startling, but also that the incident took place in the southern Indian state of Kerala. This may be an extreme example of the proliferation of a luxury item found in an unexpected context, but the amateur video footage clearly shows that the market for contemporary luxury is far from being a Western phenomenon.

Economic prosperity in Brazil, as is evident in other emerging markets, has created new high-end consumer markets. According to Euromonitor International (2012), Brazil’s luxury goods market has grown rapidly in the last decade and was valued at over US$ 7 billion in 2011. Other market estimates indicate that the Brazilian luxury market is close to US$ 12 billion (MCF Consultoria and GfK 2011). The high potential of the seventh largest national economy continues to attract ever increasing attention of international luxury brands. For example, the JK Iguatemi mall in São Paulo, which opened in June 2012, has given luxury brands such as Burberry, Gucci, and Prada, an increasingly prominent footprint. Difficulties encountered by international luxury brands, such as high taxes, red tape, and lack of infrastructure, continue to hinder market entry and expansion plans. However, the failure to gain a deep understanding of the Brazilian luxury consumer should not be overlooked. This chapter sets out to decode the luxury consumer. Indicated actions stemming from our analysis will give international luxury brands the necessary knowhow to capture a greater share of the bourgeoning luxury market in Brazil.

The rise of Brazilian luxury brands, not only in Brazil, but in other international markets, has created new and significant market opportunities. However, challenges will need to be overcome if Brazilian luxury brands are to succeed in an increasingly cluttered and competitive brand environment. This chapter gives an overview of the Brazilian luxury market, highlighting consumers’ perceptions of luxury brands. This will follow with a framework identifying possible paths for building Brazilian luxury brands.

Brands may be regarded as cultural platforms with ideological statements (Askegaard 2006, O’Guinn and Muniz 2004) as they are filled with societal values transferred via advertising, fashion and design (McCracken 1986). Luxury brands in particular are highly connected to socio-historical elements that imbue the brands’ identity (Lipovetsky and Roux 2003). Storytelling in luxury branding is a strategic element of brand success (Kapferer and Bastien 2009). To convey consistent luxury brand narratives in an emerging market, managers should dig deeply in the socio-historical construction of beauty ideals in its specific cultural context. In this chapter, we propose to tackle the issue of mapping the diverse Brazilian cultural territories of expression available to global and local luxury brands.

Together with the other BRICS countries — Brazil, India, China, and South Africa — Russia demonstrates a high potential for luxury consumption. With a total population of approximately 143 million people, a growth in gross domestic product (GDP) of 4.3 per cent in 2011, and 3.4 per cent in 2012 (The World Bank 2013), the Russian market has attracted the attention of the majority of Western luxury brands, who have established their presence in the major cities of the country by opening their own boutiques or selling their goods through major distributors.

The luxury market in Russia has evolved to become a key strategic market. Following a decline in the market value in 2009 as a consequence of the financial crisis, the market has since rebounded.¹ According to our industry data, the value of the luxury market in Russia increased by 21 per cent in 2011, which is comparable to growth rates in other key emerging market destinations, such as China and India. Luxury companies are responding to this strong and sustainable growth in consumer demand with retail expansion. For example, a new department store, DLT, was opened by the luxury operator Mercury in 2012 and two new Chanel stores were opened in St. Petersburg in 2013.

Over the past two decades, the Russian luxury market has seen phenomenal development; a growth that is still continuing despite the on-going global, financial, and economic crisis. Local leading distributors of luxury goods such as Mercury, JamilCo, and Bosco di Ciliegi, continue to benefit from high profits generated by their Russian sales. Moreover, many luxury companies such as Chanel, Dior, Zilli, and Montblanc operate successfully in Moscow and other cities of the Russian Federation, where prices are known to be considerably higher than in Western Europe. Despite this situation, more and more Russians prefer to buy foreign luxury goods in Russia, which explains the growing number of premium shopping centres and luxury malls built in the past few years. Moscow’s Stoleshnikov Lane was identified by Jones LaSalle (2011) as the third most expensive luxury shopping street in the world, after London’s New Bond Street and Avenue Montaigne in Paris.

The phenomenon of luxury has consistently been an integral part of human aspirational displays and behaviours. Passion for luxury consumption has been recorded in ancient literature, found in archaeological discoveries, and firmly continues in today’s societies globally. In a postmodern era, the demand for luxury brands is no longer principally confined to the developed world, but is visibly apparent in emerging markets. Asia’s soaring importance as the market for luxury has been well documented, and India has been considered as a high-growth market with long-term potential. The Indian luxury market is indeed thriving; in 2011 it was worth US$ 5.8 billion and is projected to reach US$ 14.7 billion in 2015 (CII and A.T. Kearney 2011).

The Hindu religion comprises millions of female gods. Each goddess has her own identity, portraying various emotions and aspects of a woman, which can often surprise the Western eye. Let us take the example of Goddess Durga, who is portrayed riding a lion which represents power, will, and determination. This expression of dominance is in contrast to the femininity of the Goddess Lakshmi, who is a symbol of fortune, wealth, and prosperity.

Luxury plays a pivotal role in the traditional structure of Chinese society. In the Confucian tradition it is used to bind the different elements of the national community. For example, in a professional context, gift-giving is a way to honour one’s superiors, peers, or subordinates on special occasions. In a family context, it is a way to show gratitude to parents, relatives, or elders. As Tsai explains, to this day, luxury remains intertwined in a web of gifts and counter-gifts that ensures the perennity of social relations and structures (Tsai 2008).

This chapter investigates how the Chinese luxury landscape is evolving, and the implications for international luxury brand strategies. Three key drivers of change are identified. First, how the meaning and perception of luxury is embedded in the past, but is responding to the changing public sentiment. Next, how new regions in China represent an increasingly significant market opportunity for long-term luxury brand sustainability. Finally, the increasing significance of heritage and country of origin, which enable international luxury brands to connect with current, but also prospective Chinese luxury consumers.

Consumption of luxury in China is not a recent phenomenon. The emperors of China lived luxurious lifestyles that were rivalled only by the Bourbons of France, the Romanovs of Russia, the Habsburgs of Austria, and the Mughals of India. As Hays (2008) noted, ‘Imperial clothes were made with silk, gold, silver, pearls, jade, rubies, sapphires, coral, lapis lazuli, turquoise, agate, various kinds of fragrant woods, kingfisher feathers and thread made from peacock feathers.’

Luxury in China immediately brings to mind throngs of Louis Vuitton-toting men and women, decked out head-to-toe in Gucci clothes. For many international luxury brands, China provided a lifeline following the global financial meltdown. Chinese consumers are undeniably one of the most important customer groups for these brands, be it within China, or abroad. In 2010, China replaced Japan as the world’s second largest economy, and barely two years later, Greater China became the world’s largest luxury market (CMR Group Research 2013). Understanding Chinese consumers has become every luxury brand’s priority.

Luxury brands have built their tremendous development on a specific business model that was developed in Europe in the 1980s and 1990s — at a time when China was not even on the radar of most luxury executives. This business model has ensured that gross margins are consistently above 60 per cent and, in some cases, reach 75 per cent. Most American luxury brands, which had gross margins between 50 per cent and 60 per cent, have since replicated this business model and, as a consequence, grown their gross margins (Figure 15.1)¹.

As the cradle of humankind and home to one of the world’s first civilizations, Africa has developed and fostered crafts, techniques, and inspirations that can be seen as some of the foundations of global luxury. For thousands of years, Africans have gathered precious stones and metals to create original objects of adornment: thick strings of beads made from precious metals, coral, amber, or glass, precious jewels such as turquoise, sapphires, rubies, and emeralds, carefully formed into jewellery or ceremonial objects; earthen clay, masterfully moulded into the forms of deities. Making use of the richness and diversity of the resources found on the continent, craftsmanship became highly sophisticated in the mighty African empires as artisans perfected numerous complex techniques under the tutelage of royal courts. In some societies, the fineries they were commissioned to create were of such importance that the craftsmen lived with their rulers; the artefacts they meticulously created were significant not only in their artistry, but as expressions of history and visual keepers of legends, to honour both kings and gods.

In Africa, growth in wealth is a longer-term trend that hails a new era for the continent. According to Capgemini’s World Wealth Report (2012), the total investable wealth of high-net-worth individuals in Africa totalled US$ 1.1 trillion in 2011. To put this into perspective, this compares with US$ 1.7 trillion for high-net-worth consumers in the Middle East. South Africa and, most recently, Nigeria are regarded as the jewels in the African crown. Bain & Company estimates that Africa has more than 120,000 US$ millionaires compared to 95,000 in Russia. It is, however, South Africa that enjoys the lion’s share, with 71,000 millionaires; about 60 per cent of Africa’s total. Similarly, the continual rise of the upper-middle class has helped to place the country on the luxury map. It is estimated that, by 2020, 420,000 South African households will have disposable income that exceeds US$ 100,000 (Rice 2013). This has translated into the arrival of luxury brands including Cartier, Burberry, Louis Vuitton, Fendi, Gucci, and Salvatore Ferragamo at luxury retail locations such as V&A Waterfront in Cape Town or Sandton Mall and Hyde Park Corner in Johannesburg. South Africa has evolved as a luxury market destination. According to Euromonitor International, spending on luxury goods increased from US$ 628.5 million in 2007 to US$ 1 billion in 2012 (Warc 2013). There seems to be no slowing down this momentum as South Africa continues to indulge in luxury products and services.

Clearly, there is no singular blueprint for international luxury brands to succeed in emerging markets. Each luxury brand and each emerging market context presents its own idiosyncrasies. Since there is no one-size-fits-all approach, managers need to learn important lessons by studying the various emerging luxury brand markets. The experiences vicariously learnt can be used to develop effective contingency strategies as companies enter and expand into emerging and new frontier markets. Beyond the emerging markets covered in this book, new frontier markets in fast-growing economies such as Indonesia, Mexico, Turkey, Nigeria, South Africa, and Malaysia, offer international luxury brands potential sources of highly profitable growth.