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Luxury Growth Requires New Ecosystem

According to a BCG report, luxe brands will have to change their current business model to include more partners and alliances if they want to continue to grow.

Forget the same-old, same-old business model in which luxury groups had total control over their brands: The new ecosystem model will require a confederation of partnerships and alliances.

According to a research report from The Boston Consulting Group on “Luxury Ecosystems: Controlling Your Brand While Letting It Go,” the new confederation that’s assembled and united by a shared vision for the brand’s future will help reduce the risks and costs of innovation as well as the challenges of scale faced by many luxury brands.

Jean-Marc Bellaiche, BCG’s global leader in the Luxury, Fashion and Beauty sectors, said, “We live in a ‘Wiki world.’ Everything is open.”

He said that social and digital media have served as a catalyst for change, forcing luxury brands to give up some control as consumers become part of the ecosystem. One example is Facebook, where consumers can voice an opinion about a brand, without branded firms having any control over what is being posted.

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In the new ecosystem, brands will continue to be influenced by consumer wants and wishes, but they’ll have to move fast to adapt to changing preferences.

Gucci is exploring new raw materials such as biomaterials and high-gravity plastics. Giorgio Armani and Kering are using Yoox Group’s Yoox.com Web site to manage many of their e-commerce sites, while Ralph Lauren and Compagnie Financière Richemont have a long-term joint venture where each has an equal share in the design and creation of luxury watches and fine jewelry.

“The growth plan for most players will be new geographies, new categories, new channels and new technologies. New, new, new. Companies can’t master everything in-house and working with a partner is more urgent now than it was 10 years ago,” Bellaiche said, adding that growth for the future requires a completely different skill set than before.

When thoughtfully planned out, brands that can pull in the right partnerships and alliances — whether for expertise in a geographic location or digital medium not available in-house — will see growth in new market categories and market locations. These arrangements will have each party putting something at stake for the grand vision of the brand in hopes of greater gains later on, with incentives increasing for both sides as the ecosystem evolves, according to Bellaiche.

According to BCG’s calculations, Europe, Japan and the U.S. will grow about 2 to 6 percent a year through 2015, while the growth rate for new markets will be 15 to 20 percent. Growth in areas such as China, India, Indonesia, Russia and Vietnam also require networks to adjust to the local preferences, as well as meet regulatory requirements in that specific marketplace. BCG also said that to be a relevant global brand, annual volume should be $1 billion and it’s even better if closer to the $2 billion level.