LVMH just released its 2016 annual report and it reveals important trends that will impact luxury brands for the years ahead.  While LVMH posted a healthy 5.4% increase from 2015 to 2016, its rate of growth was less than one-third of that from 2014 to 2015 when revenues rose a remarkable 16.4%.

This may signal the tipping point for a new, much more modest pace of growth that will be harder to come by in the future.  Bain and Company in its latest Luxury Goods Worldwide Market Study, conducted for Fondazione Altagamma, certainly believes so, as it reports:

“This is the third consecutive year of modest growth [in the luxury industry] at constant exchange rates, and it represents a new normal in which luxury companies no longer benefit from a favorable market and free-spending consumers.”

But what’s even more telling in the LVMH results is the categories in which it is finding its fastest growth — Perfumes & Cosmetics.   This ‘little luxury’ category grew almost twice as fast as the company overall, up 9.7%.

The company’s second fastest growth segment was specialty retail, rising 6.6%, which depends heavily on its beauty-centric Sephora operation.   Net/Net:  LVMH is benefiting from increased consumer spending on more affordable luxuries, like lipstick, while consumers forego indulging on many of its traditional high-priced luxury goods like its fashion and leather goods segment,which trails the company’s other segments in growth, up only 3.3%.   This goes to prove…

The ‘Lipstick Effect’ is in effect today

Juliet Shor, former Harvard University Professor, and now Professor Boston University, introduced the ‘lipstick effect’ theory based upon research for her book entitled The Over Spent American.  Her thesis:

Consumers will buy higher-priced, more prestigious lipsticks, specifically Chanel, that are used in public, vs. lower-priced, less prestigious brands that are used in privacy of the bathroom. Further in times of economic troubles, consumers will indulge in ‘little’ luxuries, like Chanel lipstick, instead of expensive luxuries, like Chanel suits or handbags.

Is the ‘Lipstick Effect’ True?

Question today is whether the “Lipstick Effect” is still true.  It proposes two basic premises:

Premise #1

That luxury is purchased primarily for status & prestige?

This is only true for some people, some of the time, which is why I reject the label “Aspirational Customers” that people in luxury circles use for those with lower income.  I favor the demographically-grounded term, HENRYs (high-earners-not-rich-yet) who are quantified by income ($100k-$$249.9k) and so can be studied, measured and targeted.

Premise #2

In times of economic turmoil & uncertainty – like today —  do consumers opt for ‘little luxuries’ rather than ‘big luxuries’?

The answer to this is “YES!”

What Makes People Happy?

Ultimately people buy luxury, whether big or little luxuries, because it makes them happy, gives them delight and makes them feel special.  Yet all academic research has shown, buying more stuff doesn’t make people happy.   Happiness comes from things people do (i.e. their experiences), not the things they have or own.

Philosopher and professor of religions, Roger Corless, expressed it succinctly:

Luxury brands need to understand that they are ultimately in the happiness business!  Our job, therefore, is to transform the luxury thing we are selling into a happiness experience for the customer.

In Marketing, Perception Is Reality

Professor Brian Wansink is the most famous social scientist that you’ve probably never heard of, though you have undoubtedly been impacted by his research.  He is a Professor of Marketing and Director of the Cornell Good and Brand Lab. He has devoted his professional career to studying people’s relationship to food.  For example, his research led many chain restaurants to spice up their menu offerings with elaborate names and mouth-watering descriptions in order to tempt diners to spend more money and to enjoy the food more.

It is from this last discovery that retailers can learn much from Professor Wansink’s work.  Specifically, if we change the customer’s perception of the product, we can change their behavior, i.e. they will buy more, and ultimately gain greater satisfaction from their purchase.

Professor Wansink and his Cornell Food Lab set up an experiment to study the effects of people’s perception on their overall enjoyment of food.  The researchers went out to a local warehouse market and bought some packaged fish, green beans, scalloped potatoes, salad, and chocolate cake.  Then they invited people in to eat the food, and that is when things got really interesting.

One group was asked to sit at plain institutional tables, given a menu card that listed the food just as above, and were served their meal on paper plates.  This ‘plain-Jane’ group got only the basic meal with no ambiance.  At the end, they were asked to rate the food served on a scale from 1 to 10, and they gave it an average rating of 3.4 points.

Another group was given an upscale restaurant dining experience.  Their tables were set with linens with candles and a flower centerpiece.  The room’s lighting was lowered just like in a fine restaurant.  This group’s menu card gave a detailed, fancy food description of the food to be served, which was presented on dinnerware plates, with restaurant-styled tableware and glasses.

While the exact same food was served to this group as the other, their food was prettied-up on the plate, as one would expect in an upscale restaurant.  When asked to rate the food, this group gave an average of 8 points on the same 10 point scale.  What accounted for the difference?  People’s perception and expectation.

Change people’s perception and expectation of the product and you change everything: what they’ll buy, how much they’ll spend, and how satisfied they will be with their purchase ultimately.  The secret is to lead with the customer’s experience, enhancing it, improving it, structuring it, and building it up, and you’ll change how your customers experience the products you offer.

Today the best way to make enhance your brand in eyes of the consumer and to make their perception more luxurious is through brand story telling.  A good brand story transforms the thing you are selling into an experience for the customer.

We need to tell new stories of luxury

Today the old ideas about luxury, like the increasingly outmoded idea that people buy luxury for status and prestige, just don’t connect with young affluents with money to spend, but in search of luxury brands that reflect their values and respect their ideals.

Old luxury has taken on many negative connotations:

• Conspicuous consumption
• Indulgence
• Exclusivity
• Elitism
• Extravagance
• Wealthy 1%

New luxury stories connect with younger consumers mindset which is searching for luxury that is:

• Practical
• Functional
• Inclusive
• Democratic
• Ultimately, more affordable

Final thoughts

• Marketing starts with understanding the consumer

Luxury brands must delve deeply into the mindset and attitudes of the affluent consumers, especially the younger highly educated customers on a career path that leads to high income.  My new mini-book,  What Do HENRYs Want? Reaching the Most Important Affluent Demographic — High-Earners-Not-Rich-Yet, uncovers their new psychology and how brands must reposition to connect.

• Calling a brand ‘luxury’ doesn’t necessarily make it so

Today’s younger, connected affluents are skeptical of brands that claim the ‘luxury’ title.  In a discussion group, a young millennial affluent said, “Luxury is just a marketers’ term that means something is overpriced and too expensive.”  Brands can’t label themselves luxury anymore; they must earn the title.

• Tell new stories of luxury for a new generation

For years, for decades, and in some cases for centuries, luxury brands have been telling aspirational stories about how ownership of the brand confers special status to the individual.

But today’s affluent consumers are not buying into that old story of luxury anymore, most especially the younger consumers.

Rather, affluents need inspiration, not aspiration, to buy luxury brands. The inspiration must come from new luxury stories that connect with the values and ideals of today’s affluents. This challenges many mainline, traditional luxury brands, but creates opportunities for emerging brands that interpret luxury in a new, value-based way.