PARIS — The luxury goods business may be global, but lately its major players have been living the local life.
Faced with a dramatic drop in tourism in the wake of Sept. 11 that has yet to fully recover, an industry that depends on travel for as much as half of its sales is focusing on driving local customers into its stores. By creating limited-edition products, opening boutiques in tertiary markets and reaching out to individual customers like never before, they’re riding out the downturn — and banking on a sales bonanza when normal travel resumes.
That doesn’t look like it’s going to happen tomorrow. The Japanese economy is still in the doldrums and there are increasing worries by both luxury analysts and consumers about the escalating conflict in the Middle East and the skirmishes on the India-Pakistan border. Nowhere has the impact of reduced Japanese travel being felt more severely than in Hawaii, where luxury sales dropped as much as 70 percent immediately after Sept. 11. Analysts estimate business in the region is still off about 30 to 40 percent. While some Japanese tourists are returning, some of the rebound is due to low-cost operators, which means the tourists are not as wealthy and aren’t buying luxury goods. “[Japanese tourism] is starting to come back but it’s not yet making headlines,” said Sagra Maceira de Rose, luxury analyst at J.P. Morgan in London. “It’s the beginning of the recovery. The yen is moving in the right direction.”
It’s not until the yen hits about 115 to the dollar that travel flows get a real boost, analysts said. At present, the yen is trading at about 124 to the dollar.
The local emphasis has been stressed by luxury executives seeking to reassure concerned investors who might be fretting over the cyclical nature of the sector, as well as its dependence on tourist dollars. At LVMH Moet Hennessy Louis Vuitton’s annual shareholders’ meeting two weeks ago, for example, chairman Bernard Arnault pointed out that Louis Vuitton derives more than 75 percent of its sales in the U.S. from local clients, not tourists. The U.S. accounted for 26 percent of LVMH’s group sales last year, France 17 percent, the rest of Europe 19 percent, Japan 15 percent, the remainder of Asia 16 percent and the rest of the world 7 percent.
“Local customers have always been our priority number one,” stressed Chanel president Francoise Montenay. “Tourists live somewhere: They are local most of the time, and they are tourists only once or twice a year. Local people are faithful customers.”
Montenay allowed that tourists may be more in the mood to buy for buying’s sake, which is all the more reason why local customers may need extra incentives to come into the store more. To that end, Chanel decided not to reduce its investments in advertising this year, nor alter its worldwide program to renovate all its boutiques.
Analysts say Vuitton is traditionally one of the luxury brands most dependent on Japanese consumers. Sales of Vuitton in the first quarter inched up only 2 percent. They were up 6 percent in the mainland U.S. and 18 percent in Japan, but off 36 percent in Hawaii and 16 percent in the rest of Asia.
Still, Marcello Bottoli, president of Louis Vuitton, said his firm depends less and less on travel for sales at its 296 stores around the world. And, echoing many of his counterparts, Bottoli said Vuitton did not introduce any special efforts in the wake of Sept. 11. Rather, he characterized the cautious approach to travel as “an unwanted opportunity to take care of our customers even better.”
“Our efforts are directed to strengthen the local business simply because it’s a more resilient business,” he said. “It is our focus from a business-building standpoint.”
While declining to provide figures, he said Vuitton’s local business is growing at a faster rate post-Sept. 11 than before the terrorist attacks on America.
To be fair, most luxury firms had already put in place extensive programs to bolster local business following the Asian economic crisis in 1997-98 and the Gulf War in the early Nineties. Indeed, the recent emphasis on ready-to-wear by such luxury brands as Gucci and Louis Vuitton is a prime example of such efforts, since local clients tend to purchase ready-to-wear while tourists prefer handbags, small leather goods and other portable items.
“I learned my lesson back in 1997 during the Asian crisis,” said Domenico De Sole, chairman and chief executive of Gucci Group. “We moved very rapidly and said, `Never again.’ Bolstering the local client base really pays off in difficult times.”
The fact that most luxury firms now control the majority of their distribution in major markets through company-owned, rather than franchised, boutiques allows them to move quickly to bolster local purchases. Personal invitations to shop, trunk shows and an overall high standard of service are among the basic tactics in Gucci’s local arsenal. “The issue is execution and executing well,” he said. “You must communicate with your customer. We use the database to be constantly in touch with our customers.”
“All our strategies are based on the local market,” agreed Sidney Toledano, president of Christian Dior Couture, estimating tourists account for roughly 10 to 20 percent of Dior sales, excluding tourist destinations like Guam and Hawaii. “We have never been dependent on the tourist business, and we won’t be dependent.”
Antoine Colonna, luxury analyst at Merrill Lynch in Paris, made a distinction between luxury firms that make watches and jewelry as opposed to “soft” luxury goods like ready-to-wear and leather goods.
“Roughly one to two buyers out of 10 for hard goods such as jewelry and watches are tourists, four to five for soft goods such as leather goods,” he said.
Despite their insistence to the contrary, Colonna suggested most luxury firms make more efforts to balance out their sales mix during a travel-flow crisis than when business is booming. In general, however, he said Gucci, Hermes and Louis Vuitton have done a good job of emphasizing local purchasing.
Executives acknowledge there’s little to be done in pure tourist locations such as Hawaii, Saipan and even Venice, where there is a dearth of local clients. “What has suffered since Sept. 11 is the duty-free business,” Montenay noted. “But duty free is a little different. They’re shopping for bargains.”
In general, luxury firms see lots of potential to boost local buying.
Bottoli said Vuitton looked at the hotel industry to help it develop the best practices for customer service. Japan, known for high levels of service, is also a benchmark. He said recruitment, training programs and “operating systems” are the keys to maximizing local consumption.
“We are developing all our one-on-one activities,” he said. “We are working with customers and accompanying them through their lifetimes, offering benefits and privileges and customizing our approach. Our main effort is not to push sales, but to pull sales.”
Special events and limited-edition products are also key tactics.
Chanel, for example, which has some 160 boutiques and 70 department store corners around the world, has staged major fashion shows in cities including Tokyo and Shanghai and reprised important launch events like its “Five Elements” jewelry launches in cities such as Taiwan, Hong Kong and New York.
Special products can also be a potent tool with local customers. Last March, Chanel advertised in local newspapers in Tokyo that it was introducing four special makeup colors at its Omote-Sando boutique. The first day they became available, customers began lining up at 6 a.m., Montenay said. In fact, 3,000 people showed up on the first day and the entire inventory, meant to last for a weeklong promotion, sold out in two days. “We have to surprise people every time,” Montenay said.
Most luxury brands have expanded their store networks to capitalize on the local business potential. For example, Hermes International credited its Tokyo megastore, which bowed in June 2001, for boosting sales in the second half of last year, despite a drop in tourism. Also, as reported, Christian Dior plans a $30 million, 16,000-square-foot flagship in Tokyo, Burberry has secured a site for a flagship in Barcelona and Vuitton is aiming to open a major unit in Moscow later this year — all more aimed at the local customer than the tourist.
“There is definitely a long-term trend for brands to capture a local base,” stressed Jacques Franck Dossin, luxury analyst with Goldman Sachs in London. “They want to be less volatile and less exposed to fluctuations in tourism.” As evidence, Dossin points to the fact that brands like Vuitton and Hermes are opening stores in less-touristy areas such as Lille or Lyon in France, and increasing local advertising.
But Dossin said there are limits on how important the local business can become versus tourism.
“I don’t think anyone would be willing to boost the local clientele at the expense of tourists,” he said. “Tourism is and will remain a key driver and a key focus for these guys.”
Merill Lynch’s Colonna agreed: “Most firms are aware of their extreme dependence and try and reduce overtime by introducing local-driven product categories,” he said. “But unfortunately there is a limit to what they can do given the heritage of the brands concerned.”””