The High-End Customer Returns From Exile

Best Practices from Kurt Salmon

As the economy begins to recover, high-end consumers are coming out of their self-imposed shopping hibernation, creating a bright outlook for the luxury segment.

The luxury market is expected to remain strong, according to Kurt Salmon’s Luxury Spending Trajectory. The index, based on multiple measurements of consumer sentiment, is released monthly and provides insight into the following month’s revenue growth in the luxury sector.

Of the luxury consumers surveyed—those in households with annual incomes of $150,000 or greater—42% say they are confident or very confident in the economy, compared to 28% for lower-income consumers.

Luxury consumers have a reason to be confident. High-income consumers appear to be recovering faster from the recession than lower-income consumers and are also less likely to be worried about losing their jobs.

Recovery of the stock market, up 60% in the past two years, also boosts the luxury consumer’s confidence and spending power, as higher-income consumers are more likely to own stocks than those earning less.

Luxury retailers and manufacturers are benefitting from this regained confidence. Since the bottom of the recession, public luxury company valuations have more than doubled compared to the valuations of their mainstream peers. These gains in valuation have been fueled by revenue growth, operational improvements, increased margins and reduced costs. More importantly, the street has rewarded luxury companies with a 20% increase in average EBITDA multiple vs. the lowest point of the recession.

But even though the luxury forecast looks bright, luxury retailers are still battling for share. With more designers opening up boutiques, and with the increasing availability of luxury goods online, luxury retailers are increasingly trying to provide the highest quality and value to best serve their core customers and differentiate themselves from competitors.

Increasingly, industry leaders say they must differentiate themselves by creating an emotional connection with consumers, building preemptive distribution that allows the retailer to serve and engage customers across different transaction channels and marketing interactions, and establishing control of their supply chain.

To create an emotional connection with customers, leading retailers are developing a clear customer experience strategy that brings the value proposition to life for the target consumer. This strategy considers all possible interactions with consumers—both existing and potential—to create preemptive distribution.

For example, Louis Vuitton stresses the importance of offering a refined experience and luxurious atmosphere to increase store productivity. The retailer’s stores are also designed to keep customers from feeling cramped.

Several luxury retailers are enhancing their in-store customer experience with the help of new technology. Nordstrom, for example, is testing iPads at its bridal shops and special-occasion dress departments as a form of personal shopper that allows customers to see dress colors and styles that aren’t available in-store. Burberry has iPads on hand in some stores to let customers view its runway shows and place orders instantly.

Developing these emotional connections will be even more important as increasing raw materials, overseas labor and energy costs continue to put pressure on margins in the coming months. Luxury retailers who have developed broad and deep connections with their consumers will be the most successful at passing on some of these cost increases to their customers. At the same time, focusing on efficiency and flexibility across all aspects of the retail supply chain will help control costs.

Although the entire retail industry will likely experience some pressure from these cost increases, higher-end customers who frequent luxury retailers may be less dissuaded by price increases compared to lower- and middle-income consumers, who may be less able to make discretionary purchases or to pay more.

Centered on the luxury experience, luxury brands are wellpositioned to weather the retail industry’s current challenges and chart a path for continued growth.

Greg Ellis helps lead Kurt Salmon’s Customer Experience Practice. He has over 10 years of experience advising industry.