Mass vs. class

By Peter Gumbel, Fortune

So who's right? Neither side is on particularly solid ground, because even the stuffiest companies are stretching themselves wide to appeal to a range of consumers. What's unquestionable, though, is that the key to luxury today lies in creating an emotional rapport between the consumer and the product. If enough consumers believe it's luxury and are prepared to shell out accordingly, then luxury it is.

The hard part is what Stefania Saviolo at Milan's Bocconi University calls the "art of dream maintenance." It means thrilling your customers and bringing them back again and again. For the accessible-luxury players, the challenge is keeping up quality and design as they produce wave after wave of new products. The big-name houses have an easier time because of their tradition of craftsmanship and strong legacies.

Visit the Milan office of Ermenegildo Zegna, CEO of the eponymous men's wear firm, and you'll find a picture of his grandfather's woolen mill in Trivero, where the firm began in 1910 and where much of its production is still based. "More and more customers want to know what is behind the brand," Zegna says. The firm sells a lot of $2,500 suits, of course, but in the past four years it has also rolled out its own fragrance and sunglasses. This fall it will introduce a line of underwear.

Stretching your brand like this can be risky, even for the most history-laden houses. "Diversification is the rule of the game, but you can't do everything," warns Francesco Trapani, CEO of Italian high-end jeweler Bulgari, which has gotten into hotels and is about to launch a line of skin-care products. "The danger is, you do something badly, and then you don't just lose money but your reputation."

There's also a risk of overexposure, particularly in Japan, which accounted for as much as 40% of worldwide luxury demand over the past decade. Already, 94.3% of Japanese women in their 20s own a Louis Vuitton item, according to one Japanese research institute.

The nightmare scenario is that your brand suddenly becomes banal or vulgar. That happened to Pierre Cardin, who pioneered the use of licenses in the 1960s only to lose control of the hundreds of products that ended up bearing his name. For a while it happened to Burberry. A British outerwear company best known for its trench coats, it underwent a transformation in the 1990s at the hands of an American CEO, Rose-Marie Bravo, who used Burberry's distinctive plaid on products from bikinis to strollers.

That made it a hit worldwide, but her strategy backfired in Britain when soccer hooligans and tart-tongued tabloid actresses adopted the Burberry plaid as their own status symbol. For a time, nightclub bouncers in Britain refused entry to people wearing Burberry caps. The firm succeeded in containing the problem to Britain and moved aggressively to resolve it. Christopher Bailey, brought in as designer in 2001, has deemphasized plaid and played up other icons of the brand, such as a horse and knight. He describes the new look as "disheveled elegance - it's luxury, but there's a familiarity about it."

Drinks companies faced a similar dilemma when rap stars feted Cristal champagne and Courvoisier cognac in their lyrics. That helped boost sales, but it made some executives uncomfortable. Last year rapper Jay-Z called a boycott of Cristal after interpreting remarks by one of the maker's executives as racist.

But at least some wealthy people aren't interested in the familiar. As the number of high-net-worth individuals in the world has doubled in the past decade, Vuitton, Cartier, and others are in a race to the top to woo them. Even as they look to extend their brands downward, they are offering limited-edition or one-of-a- kind products at stratospheric prices.

Buy that $220,000 Vuitton Tourbillon watch and the company will incorporate your zodiac sign on it. Or perhaps you'd prefer the ultra-limited edition: one of just five trunks containing 33 Marilyn bags, each in a different shade of crocodile leather, for which Vuitton won't disclose a price. CEO Carcelle says that these "über-luxury" items account for a minority of sales, but that it's a high-growth area. "There is demand for things that are incredible and unique," he says.

And we're not just talking about Russian billionaires. Burt Tansky, CEO of Neiman Marcus, told a luxury conference in June that the expensive-accessories business at his stores, including shoes with $600-plus price tags, has "just gone crazy." Luxottica, the Italian eyewear company Luxotica (Charts) that makes sunglasses for Versace and Bulgari, reckons there's enough demand for shades costing $1,000 or more that it's rolling out a new line of high-end retail stores starting in New York City this fall.

Is the sky the limit? Hennessy is testing to find out. The spirits company is selling a limited edition of 100 bottles of cognac for $200,000 a bottle. It's a blend of the best eaux de vie in the house, but a big part of the attraction - and price - comes from the packaging: a case surmounted by Venetian-glass pearls and fashioned by artisans who usually make stained glass for cathedral windows. "It's more like a work of art than a consumer product," says Moët Hennessy president Christophe Navarre.

Even so, $200,000? At rival Rémy Cointreau, Christian Liabastre is too polite to criticize the competition directly. Rémy has its own limited edition called Black Pearl that it released last year in a Baccarat crystal flask. It retails for about $10,000. No, he's not tempted to follow Hennessy's lead. "You can't say this is perfection," Liabastre says, pointing to the Black Pearl flask, "and then come back later and say, 'We've got something even better.' "

Tell that to hoteliers in an age when seven stars is the new five. At the Plaza Athénée in Paris, owned by the Sultan of Brunei, where a standard room costs $950 a night, chief operating officer François Delahaye strides through the flower-bedecked lobby, pointing out the historical fixtures and the formal Michelin three-star restaurant.

Then he rounds the corner to show off his pride and joy: the bar, revamped to look like an ice cube, complete with video image of a crackling fireplace and a carpet woven from a pixelated close-up of Madonna's face. "Big shock, right?" he asks. It's all an attempt to bring in a younger affluent crowd. "The sons and daughters of our guests," he says, "are fed up living with Louis XV style." The contrast is jarring, but in some ways it symbolizes the restless state of luxury today. It's a world in which the snobs want to be a little bit populist, the populists want to be a little bit snobbish, and everyone has his fingers crossed that the extraordinary demand of the past decade will continue unabated. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.