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Aline Serret Année universitaire 2010/2011
M1 LEA Commerce International
IMPACT OF THE ECONOMIC AND FINANCIAL
CRISIS ON THE LUXURY SECTOR
Faculté des Langues
Professeur suiveur : M. Sherratt Université Jean Moulin
Lyon 3
Summary
Acknowledgements 1
Presentation of the company 2
Presentation of the internship 4
Impact of the economic and financial crisis on the
luxury sector 7
Introduction 7
I. Luxury sector hit hard by the crisis 9
1. Most serious crisis in the sector for decades 9
2. In the grip of the crisis: the example of Chanel 10
3. Different economic consequences according to locations 11
II. Relative impact on well-established luxury goods
companies 13
1. Luxury armed against the crisis 13
2. Consumers need for luxury 14
III. How did luxury goods companies respond to the crisis?
16
1. Adapting to the demand 16
2. New marketing strategies to revise market positioning 17
3. Restructuring programmes to deal with the crisis 18
Conclusion 20
Appendix 21
Internship appraisal («Attestation de stage»)
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Acknowledgements
First of all, I take this opportunity to gratefully
acknowledge M. Jean-Claude Piveteau, Autajon Group's HR manager, who accepted
my application for this internship and enabled me to integrate such a dynamic
and worldwide company as Autajon Group.
I wish to record my thanks to Mrs. Alice Hanot, HR development
manager, and M. Nicolas Ricaud, international division HR manager, who have
been my tutors during my whole internship and who were always present for me
when I was burdened with doubts and uncertainties.
Julie Drevet and Benjamin Gerenthon, intern and junior
webmaster respectively, who I worked with in my different missions, have been
very friendly to me from the very beginning and helped me integrate into the
company.
My University, the Université Jean Moulin Lyon 3,
enabled me to benefit from a rewarding professional experience during my
education which I know is a significant asset nowadays.
Finally, I wish to thank my English teacher, M. Robert Sherratt,
for accepting to be my `professeur suiveur' and correcting my report.
Aline Serret
Presentation of the company
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Autajon is an international-scale group with more than 3,000
employees. Its experience and its innovation capacity, its reputation and the
technical expertise of its employees are world leader in its industry: the
manufacture of folding cases and labels.
Little history
1964. Establishment of the company: Alain
Autajon starts his activity manufacturing folding cases for the pharmaceutical
industry in Montélimar (Drôme, France).
1978. Market and product diversification: the
company extends its activity to the perfumery and cosmetics markets.
Prestigious brands trust the firm since then. The experience and know-how
acquired lead the company to diversify its production towards luxury boxes.
1995. First external growth in France: the
acquisition of a business complements Autajon's activity by the production of
POS advertising and card packaging for automobiles, small equipment, textile
and confectionery. Autajon becomes a Group.
2001. International expansion: the second
acquisition of Autajon Group is a German specialised company in the manufacture
of boxes for perfumes and cosmetics, pharmacy and confectionery. Autajon
Group's development policy is extended from 2004 to 2009 through the
acquisitions of various companies across the world.
- Appendix 1: Autajon Group site locations
2002. Wine labels diversification: the
development of Autajon Group continues with the purchase of a company making
wine labels. It is a new activity for Autajon but remaining in its core
business, printing.
- Appendix 2: Autajon Group sites by sector
2011. Group's international strengthening:
Autajon Group has expanded its presence in Europe and the United States. It has
more than 3,000 employees, distributed on 23 sites, and its turnover exceeds
400 million Euros. Thus, the Group strengthens its leading position in the
manufacturing of folding cases and labels (wine-growing and industrial
sectors).
- Appendix 3: Evolution of Autajon Group's turnover
- Appendix 4: Turnover distribution by market segment
Each site of Autajon Group belongs to one of these 3 divisions:
Packaging, Wines & Spirits labels, Industrial Labels.
Autajon Group has experienced a dynamic and continuous growth
from the very beginning. This success comes from the commitment of its
employees that combine a passion for their craft and their skills with the
ambitions of the Group.
Its principles (performance and innovation, teamwork,
integrity and corporate social responsibility) not only guide the actions of
each but they also guide the Group's social policy.
Furthermore, diversity and mobility have become gradually
integrated as axes of HR development, in connection with the presence of the
Group in Europe and the United States. The Group's expansion creates more
opportunities for work and offers employees the possibility to follow a
rewarding career path.
Presentation of the internship
I am currently ending my first year Master's in International
Business and Foreign Languages (English-Spanish) and this internship which is a
compulsory part of my degree was an opportunity for me to improve on my
professional experience. With more and more people doing internships, employers
expect to see them listed on the résumés of potential employees.
Internships allow to develop professional skills and acquire knowledge in
addition to formal degree courses. Internships are an excellent way to enhance
the quality of the résumé and to differentiate oneself against
other applicants.
Corporate life is not the same as life in a student
environment. Internships enable to discover the working atmosphere and
different corporate cultures. When you carry out an internship you get to work
with various people, you should take advantage of it to broaden your network
and personal experience. It was my intention to become fully integrated in
corporate life and to provide professional and effective work. In addition, I
was willing to adapt to a new environment and new situations as well as the
requirements and working methods of an international firm.
During this two month internship, I have been able to put into
practice the knowledge I acquired during my studies and my work experience.
What is more, as I have no concrete idea of my professional
life plan yet, this internship was an opportunity to have an experience in a
new field. To carry out different tasks and functions is an effective way to
find out what is made for you or ,conversely, what is not.
It was no easy task to find my internship this year. I was really
willing to do it abroad, and especially in such an active and vibrant city as
London where I had been doing an
Erasmus exchange throughout the academic year. My objective
was to improve my level of English and in particular to discover English
corporate life and culture. Unfortunately, it was difficult, if not impossible,
to find offers for internships in that region. After several months, I started
sending résumés to big international French companies without
conviction. It was a huge chance for me when Autajon Group, one of the biggest
companies in my region, called me back for an interview.
My missions
In the course of my two month internship, I carried out different
missions.
At the beginning, the main mission the company was hiring me
for was the translation of the new Human Resources website.
Thus, I was based in the headquarters in the HR department where I carried out
a completely separate function in relation to other employees there, as a
translator.
The HR team put the raw text at my disposal. Text they had
been working on for several months and that was validated by the HR manager.
Translating a website consists in translating the text first and then
integrating texts into the internet `page' through a website management
software.
The company needed the translation into three languages:
English, Spanish and German. I am almost fluent in those three languages and
specialised in the study of foreign languages, so the company was very soon
convinced that my knowledge would come up to their expectations. As a LEA
student, I have a good grounding in translation and grammar in English and
Spanish. Regarding German, I know the language from my mother who was born in
Germany.
So I translated the three versions of the website within one
month. Each time I finished a translation, I was asked to send my work to the
HR site manager of the
corresponding subsidiary (to the USA, Spain and Germany) for
him to do a little checking as a precaution. This took a lot of time and I had
to wait for their answer to start integrating texts into the final website.
Once I had finished my initial mission, my managers (and
sometimes managers from other departments) gave me little documents to
translate such as internal notices, training programmes etc.... These
contained very technical terms relative to the company's activity (labels and
cardboard packaging manufacturing) which enabled me to deepen my vocabulary and
my translation technique.
Impact of the economic and financial crisis
on the luxury sector
Introduction
What is luxury today? A world of privilege and extravagance
associated to wealth. Luxury comes from the Latin word luxus which
means `excess'. Luxury represents what is totally superfluous. It is
unnecessary but belongs to the world of dreams and pleasure. It is the contrary
of vulgarity, what is exceptional, of excellent quality, an atmosphere...
Nearly unique products, luxury also rhymes with rarity. For that reasons, the
luxury goods industry is fascinating and subject to numerous studies.
Luxury goods consumption can be very interesting and
contradictory. Consumers are attracted by the possibility to differentiate
themselves from others by means of rare and top-quality products. The prestige
and status conveyed by these goods express a sort of belonging to a specific
small group of people who can afford them. Indeed, luxury goods consumption can
be contradictory in the sense that cultural differences arise: the Americans
generally buy luxury products for `ostentation' and social status whereas the
French are more in search of pleasure, way of life and emotion.
To give some figures, this industry is significant in terms of
sales and prestige for example for France which is the world leader with a 34%
market share, far before Italy: 20% and the USA: 14% (French government, 2009).
It is the second exporting industry after aeronautics, without any subsidies.
Top luxury global brands include LVMH (Moët Hennessy - Louis Vuitton) with
a brand value of $21,860 million, Gucci with $8,346 million, Hermès
with $4,782 million or Tiffany & Co. with $4,127 million
(Interbrand best global brands ranking, 2010).
The recent US sub-prime mortgage crisis in 2007 that provoked
a slowdown in the American economy and billions in losses by their banks, has
quickly affected the entire world. The American economy is currently
experimenting a crisis and global growth still depends a lot on American
growth. The American sub-prime mortgage crisis turned into a global credit and
then liquidity crisis. The financial crisis started from real-estate and
banking up until reaching the stock market.
According to the IMF, all zones of the globe and all sectors
were affected in a different way. Developed countries (USA, Europe and Japan)
have been hit more violently than emerging countries (China, Brazil) and the
industrial sector (automotive) and real-estate have been most affected.
Regarding the luxury sector, it is of great interest to analyze whether big
brands suffered from the crisis or if consumers simply continued buying luxury
products to keep the status they convey. Sales at half-mast, price stagnation,
stores opening delayed... the luxury sector, haven of prosperity for a long
time, started in turn to suffer from the crisis, even if companies forecast
significant margins for the months to come.
In order to analyze the impact of this crisis on the luxury
sector, we will in a first part focus on companies which did suffer from the
crisis and in a second part we will see that this impact was quite superficial
on some other companies. Finally, attention will be paid to how companies faced
this crisis from a strategic perspective and responded to it.
I. Luxury sector hit hard by the crisis
Historically the luxury business has always been immune to
uncertainties and crises. It is of great interest to see how it reacts in a
financial crisis. The first six months of 2008 gave the impression that the
luxury industry would only be slightly affected by the economic slowdown. But
the crisis did not spare anyone, not even luxury. One could have thought that
the sector would be protected, considering its margins and specificities, but
most groups lost 40% of their stock value according to the World Luxury
Index.
To better understand the consequences of the economic and
financial crisis on the sector, we will first state some figures of this slump
before studying a precise example of one company in this turmoil. Finally we
will analyze the difference in consequences between locations.
1. Most serious crisis in the sector for decades
Fall in sales, lower recruitment, job cuts, delayed store
openings... After four euphoric years with more than 10% growth per year, the
luxury sector witnessed a 4% decrease in sales in 2009, according to the
American financial services firm J.P. Morgan. The German Deutsche Bank even
counted on a fall from 10 to 15% for some brands. This is the first recession
experienced by the sector for decades. In order to protect themselves, luxury
goods companies reduced store-opening plans, froze recruitment, closed certain
shops and focused on their core profession: most of the attention is paid to
their flagship products and effective marketing.
Big names were not spared: the growth of the world leader LVMH
was reduced by half in the third quarter of 2008 compared to the beginning of
the year. Champagne producers announced a 6% drop in sales during the first
eleven months of 2008, the jeweller Cartier (Richemont Group) three months
short-time working for 180 employees, and Chanel
the termination of 200 fixed-term and temporary contracts.
British luxury brand Burberry cut 540 jobs as well as the big American stores
Saks with 1,100 jobs. Even the British Bentley, which cars can cost up until
260 000 Euros, interrupted its production for seven weeks. Its colleague Aston
Martin, which had already announced 600 job cuts in December, implemented the
three day working week in its plants in Gaydon (central England).
From the watch-making to the motor car industry, through
jewellery, fashion and arts, the collapse of the financial market affected the
entire luxury economy. According to Pictet Funds, growth in the luxury sector
was meant to be close to zero in 2009 in the USA and in Europe. In fact, it
occurred to be even worse since the sector entered in recession with a growth
rate of -5,9% that year (Eurostat, 2010). In comparison, previous years had
registered record rises of about 20%.
2. In the grip of the crisis: the example of Chanel
Chanel is one of these brands you do not need to introduce
anymore. Owned by the Wertheimer family at 100% since 1954, it is a French
haute couture house with a yearly turnover of nearly one billion Euros. Its
sophisticated and classic style are world famous in the luxury sector and
enabled the company to gain international renown.
Like many other actors in the industry, Chanel was hit hard by
the crisis. It was quite unexpected for such a well-established brand to be
affected since it is one of the biggest haute couture house in the world.
Nevertheless, Chanel saw its sales starting declining in the end of 2008 and
beginning of 2009. The group decided to end all temporary contracts from
December 2008: 200 fixed-term and temporary contracts, which represented about
10% of the production workforce. These job cuts were due to a sharp decrease in
Chanel's activity which growth rate was close to zero that year according to
the CGT. This reduction particularly affected 16 employees of the brand's
mythical store rue Cambon, in Paris.
In addition, Chanel had to cancel its `Mobile Art Tour', a
mobile art gallery tour across the world. The group preferred to give up this
`image campaign' given the context in order to focus on more `strategic
investments'.
3. Different economic consequences according to
locations
For several years now, the significant growth in the luxury
sector has been supported by the dynamic demand in emerging countries or BRICS
(Brazil, Russia, India, China and South Africa) in addition to `traditional'
consumers in developed countries (mainly the USA, Europe and Japan). The
economic and financial crisis that began in the US in 2007 hit those regions
differently and created a gap in luxury goods consumption between them.
Luxury is European. Customers' idea of luxury from countries
such as Russia, China or Brazil is indeed shaped by European brands. Gucci,
Louis Vuitton, Chanel, Rolex, Mercedes, Dior or Armani are quoted spontaneously
as luxury symbols. In these countries, Europe embodies quality and modernity.
That is why, in addition to their high disposable income, consumers in emerging
countries are the driving force behind sales of luxury goods.
Developed countries were experiencing the worst crisis for
decades that was cutting their incomes and purchasing power. The Japanese
market was especially affected because the country had entered a recession.
LVMH's sales dropped by 7% in the first nine months of 2009 and the group had
to reduce prices to face the crisis and also to adapt them to the fluctuation
of the Euro that had depreciated against the yen. In this context, the luxury
leader was also forced to give up the opening of one of its world biggest Louis
Vuitton store in Tokyo.
The major actors which saved the luxury sector in 2009 are
emerging countries. They have been the only driving force at the time when,
anywhere else, the decrease was really substantial in historic luxury
countries. As a concrete example, the consulting firm Bain & Co. announced
that after a sharp decrease in 2008, the luxury market had picked up by 3% in
Europe in 2009 whereas unsurprisingly it had recovered by 15% in China.
From this crisis we should remember that luxury is not immune.
Yet it has strong recovery capacities, significant disparities and most of all
a great driving force: emerging countries.
II. Relative impact on well-established luxury goods
companies
The luxury sector however suffered less from the crisis than
others and its margins, even if decreasing, remained very high: those of
Richemont and LVMH reached around 18% in 2010 against 21% in 2007, explained
the Japanese consulting firm Nomura. Furthermore, the crisis did not affect all
countries and all products in the same way. Certain market segments were hit
more violently and for instance, watch-making had harder times than leather
goods.
To demonstrate that the effects of the crisis have not always
been as considerable as believed, we will analyze its consequences on big
brands in the sector and then study this relative drop from the consumers
perspective.
1. Luxury armed against the crisis
2008 and 2009 marked a break as luxury also entered a
difficult period. But there was no need to panic, anyway, not as much as in the
motor car or real-estate sector. It is high end products (sports cars, haute
couture, fine wines) that might be expected to take the hardest and most
immediate hit. But many people in luxury goods are confident that the highest
echelons of wealth will always have disposable cash for type of products. Chief
vintner at Champagne house Moët & Chandon, B. Gouez, said: `We are
more than two centuries old and crisis and wars and problems, we have known
them all in the past and we are still here'. Brands with strong tradition and
worldwide fame will always do better than other more modest brands that will
stay in difficulty.
Undoubtedly, some signals of crisis appeared in the luxury sector
in the course of 2008 but overall if the world was taken as a complete market
place, the situation was still
good for the sector. Even as Wall Street imploded, LVMH bought
Dutch mega-yacht builder Royal van Lent in 2008 and Giorgio Armani was going
ahead with a fashion hotel in Milan.
Big luxury groups made huge efforts in order to control their
distribution network mainly through integrated, self-owned stores. This is a
considerable advantage. By means of this network, companies receive a bigger
part of the margin and they also gain fame compared with brands distributing
their products via independent distributors. This is a major asset in times of
crisis. As an example, Yves Saint Laurent carried out a complete distribution
reorganization by acquiring stores they are the only owner today.
In the same way, it is very profitable to own its own stores
in emerging countries. Due to their significant acquisition capacity compared
to little groups, only big luxury goods companies were able to enter these
markets. Today, about 30% of these companies' turnover comes from so-called
emerging regions.
2. Consumers need for luxury
According to the polling organization IPSOS, there was no
break in luxury goods consumption due to the crisis, the desire to buy luxury
products is still there. Despite the crisis, some 6,000 people expressed
interest in buying Ferrari's new California, which retails for around
€179,000 in Europe, even before Ferrari opened its book for orders. No
Lamborghini orders had been cancelled. The world has never before seen so many
people being able to afford so many luxury products. According to B. Gouez from
Moët & Chandon, `even if some people are hit by the crisis, there are
still more people drinking Champagne than 10 years ago'.
However, luxury goods customers ask for more authenticity and
historic know-how from now on. Quality or experience are the main reasons they
buy these products for. The crisis slightly altered luxury consumers'
behaviour: most people acknowledge buying products even if the price is very
high but today the crisis changed values consumers associate with luxury. High
quality raw materials, design, experience are more important
characteristics in the eyes of these `absolute consumers'.
People turn to luxury when times are hard and need or like to dream more.
Actually, luxury products are never more necessary as in though periods.
III. How did luxury goods companies respond to the
crisis?
In the face of such a turmoil, the luxury sector had to react
and adapt to the context in order to pass through the crisis. It succeeded in
limiting the damage because this market is multiform: by the variety of its
products and also geographically since it is global. Here again, there was a
`two-speed' luxury. For leading groups, the reduction in margins was real but
gross profits remained very satisfactory and profitability attractive for most
brands. At the contrary, some groups that were heavily in debt were weakened
substantially.
To understand how companies managed the crisis and survived to
it, we will first show that they had to adapt to consumers' tastes and changes
in preferences. Secondly, we will analyze the marketing strategy they adopted
to boost their activity. Finally, we will focus on restructuring programmes
they implemented to deal with the crisis.
1. Adapting to the demand
As seen in the previous part, consumers' tastes change when a
crisis occurs. The only segment that did well is leathercraft because these
products are fashion accessories, must-haves, the most affordable access to
luxury brands and at the same time the most visible. It is one of the most
important category of products sold in the luxury sector. For that reason, big
groups such as Hermès, Vuitton or Gucci focused on this type of products
in order to maintain their profits. Their worldwide fame as well as their
presence in various countries of the globe (through an integrated distribution
network made of self-owned stores) enabled them to resist to the crisis.
Thanks to this kind of network, companies can understand
cultural aspects in different countries and adjust their business accordingly.
This was of crucial importance during the crisis that rocketed the sector. For
smaller companies at the contrary, it was more
difficult to adapt to local customers' tastes as they did not
possess this kind of network and international brand image.
Companies must focus on customer comprehension and indentify
their needs, expectations, desires... The price is also a major factor. These
actions are of great importance and must be carried out carefully because they
enable companies to adapt the range of products they offer in specific market
segments. In the context of the crisis, middle-income consumers cut their
`extra' spending sharply. The very rich saw their net worth dramatically
reduced by the fall in stock markets and property values, decimating demand for
super-luxuries like yachts, cars and property-related purchases. To respond to
this threat, luxury goods companies decreased their prices and tried to exhaust
stocks. Nevertheless, this measure had to be taken carefully since an excessive
decrease could undermine luxury products and especially the brand's image.
2. New marketing strategies to revise market
positioning
In line with their adaptation to customers, luxury companies
had to think about repositioning since policies that worked well before the
crisis no longer made sense. Luxury companies decided to cut their marketing
spend (massive and expensive promotion, stores openings, advertising
campaigns...) while maintaining strategic investments: Chanel gave up its
Mobile Art Tour, a worldwide campaign, Louis Vuitton had to abandon the idea of
opening one of its biggest stores in Tokyo...
Companies carried on investing but in a more strategic way.
They invested more in quality, retail network development and intellectual
property. Furthermore, big groups which were not in debt and had investment
capacities understood that market needs are changing and tried to act
accordingly by reducing their product portfolio and concentrating on markets
that are growing such as China and Brazil. Efficient repositioning means that
instead of relying just on brand power, companies refocused on those markets or
segments that were most likely to sustain revenues.
Luxury goods companies must implement new strategies in order
to manage successfully the gap between offer widening and preservation of
excellence. There is a risk of democratization. The issue is complex: diversify
production but maintaining rarity and know-how so as not to break the code of
traditional luxury. Maintaining dearness and difficulty of access, which are
the bases of luxury, while keeping making profits. There is a real risk of
popularization.
A lot of luxury brands use a strategy copied on LVMH:
diversification and portfolio management. It consists in possessing a brand
portfolio (in that case for LVMH: Louis Vuitton, Kenzo, Fendi, Henessy...) led
by one big, heavily-promoted brand (here Louis Vuitton). Profits made from this
flagship brand help to emerge new growth through the group's smaller brands.
For instance, PPR Group (Gucci, Balenciaga, Yves Saint Laurent...) uses this
model and is able to maintain all its brands thanks to this strategy: 20,6% of
Gucci's margins make up for Yves Saint Laurent's losses.
Finally, luxury brands recentred their advertising and
promotion strategy even if less investments were dedicated to this field.
Marketing was made for customers, with a view to satisfying them perfectly, on
the basis of questions such as: is our product or service suitable for
customers in the market segment? How should we promote it? How should we sell
and distribute it? Implementing a new marketing strategy is no easy task and
this must be done very carefully in order not to lose the `country of origin'
effect (the `made in France' or `made in Italy' are best selling assets).
3. Restructuring programmes to deal with the crisis
When the crisis hit the luxury sector, two major categories of
companies appeared. On one hand, groups with independent distribution networks
and on the other hand groups using integrated distribution networks (i.e.
groups possessing their own point of sales network). The latter enables the
company to act simultaneously as producer, wholesaler and retailer and thus
control the distribution of its products perfectly.
Consequently, groups having an integrated distribution network
with their own stores such as Hermès, Gucci or Louis Vuitton resisted to
the crisis. This system allowed them to react quicker than their rivals when
consumers' needs changed locally and they were able to adapt their production
and marketing strategy accordingly. At the contrary, groups like Richemont,
Estée Lauder or l'Oréal Paris which depend on multibrand
distribution networks had more difficulties to face the crisis. Big luxury
brands learnt a lesson from the crisis and will come out stronger with new
selling techniques and new priorities.
In the context of the crisis, luxury companies that were not
present in Asia or South America understood the importance of such emerging
countries for their sector and started planning their expansion in those
countries. For instance, the German brand Hugo Boss forecast to strengthen its
presence in China as the country looked likely to become one of its three
biggest markets by 2015. Luxury goods companies multiplied acquisitions and
promotion in those countries which are said to be the driving force of luxury
for years to come.
Conclusion
Even if the luxury sector entered the crisis later than other
industries, it was hit hard eventually. Nevertheless, the first figures of 2010
are very promising (4% growth in the first quarter), especially given the
sluggish global economy. The context favours a new concentration of the market
in which leaders (very top of the range brands) have low debt levels and
significant expansion capacities. There is a gap between these brands and
smaller brands which face big profit issues.
Luxury seems to be reborn and the main reasons behind it are
interpreted as the nature of luxury itself and its unique consumers. Consumers
are less in search of ostentation, status but rather discreet and quality
products. At the same time, they are no longer facing dominant brands who
impose the codes of luxury. A more balanced relationship is born in which
luxury brands must listen and interpret consumers' desires and expectations.
Nothing is going to be like before the crisis anymore and this gives a new
sense to luxury consumption.
Appendix 1: Autajon Group's site locations
Source: Autajon Group
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Appendix 2: Autajon Group's sites by sector
Source : Autajon Group
Appendix 3: Autajon Group's turnover (M€)
Source: Autajon Group
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Appendix 4: Autajon Group's turnover distribution by
market segment
Source: Autajon Group
Internship appraisal («Attestation de stage»)
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