ACADEMIC ENGLISH (2) / MANAGING A PROJECT

Gandhi once wrote that „a certain degree of physical harmony and comfort is necessary, but above a certain level it becomes a hindrance instead of a help.“ This observation raises interesting questions for psychologists regarding the effects of luxury. What psychological consequences do luxury goods have on people? In this paper, the authors argue that luxury goods can activate the concept of self-interest and affect subsequent cognition. The argument involves two key premises: Luxury is intrinsically linked to self-interest, and exposure to luxury can activate related mental representations affecting cognition and decision-making. Two experiments showed that exposure to luxury led people to think more about themselves than others. Key concepts include: Luxury does not necessarily induce people to be „nasty“ toward others but rather causes them to be less concerned about or considerate toward others. Experiment 1 showed that when primed with luxury, people are more likely to endorse self-interested business decisions (profit maximization), even at the expense of others. Experiment 2 further demonstrated that exposure to luxury is likely to activate self-interest but not the tendency to harm others. Exposure to luxury goods may activate a social norm that it is appropriate to pursue interests beyond a basic comfort level, even at the expense of others. It may be this activated social norm that affects people’s judgment and decision-making. Alternatively, exposure to luxury may directly increase people’s personal desire, causing them to focus on their own benefits such as prioritizing profits over social responsibilities. 

https://hbswk.hbs.edu/Pages/browse.aspx?HBSTopic=Luxury

Are people who travel in town cars and on corporate jets different—on a psychological level—from you and me? Does the availability of luxury goods „prime“ individuals to be less concerned about or considerate toward others? The answer from new research seems to be yes.

HBS professor Roy Y.J. Chua and Xi Zou, an assistant professor at London Business School, suggest that luxury goods have an important effect on human behavior that is only now becoming clear—and that may have implications for addressing the continuation of objectionable choices among, for example, high-flying executives on Wall Street.

According to Chua, their research found that „people who were made to think about luxury prior to a decision-making task have a higher tendency to endorse self-interested decisions that might potentially harm others.“ Their findings are detailed in the HBS working paper „The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making“ [PDF (pdf)].

„Will the same business meeting reach different decisions when it is held at a luxury resort as opposed to a modest conference room?“ the authors write. „Will CEOs who bequeath themselves expensive office facilities and luxurious corporate jets make different business decisions than those who do not? In this age of Wall Street excesses, these are pertinent questions that could further our understanding of why some [people] continue to place their own interests over others‘, even in difficult economic times.“

Chua, whose research draws on human psychology to better understand important social processes in business organizations, explained more about the findings in an e-mail Q&A.

Sarah Jane Gilbert: You conducted two experiments to explore a psychological link between the notion of luxury and self-interest. What did you find?

Roy Chua: In the first experiment, participants were asked to answer a series of business-related decision-making questions that were designed to tap the extent to which people place self-interests (profit maximization for one’s firm) above society interests. An example involved asking participants how likely they are to endorse the manufacturing of a new model of car that could bring in enormous profit but could potentially pollute the environment. Before answering these questions, half of the participants were asked to evaluate luxury products, while the other half evaluated cheaper equivalents. We found that people who were made to think about luxury prior to the decision-making task have a higher tendency to endorse self-interested decisions that might potentially harm others.

These results led us to wonder whether „luxury-primed“ individuals are simply self-interested or are indeed more prone to harm others. Thus, we conducted a second experiment that was similar to the first one in that the participants were either primed with luxury or not. The difference is that after the prime, we asked them to do a word recognition exercise. The task was to write down the first word that came to their mind when given a string of scrambled letters. These strings of scrambled letters were each constructed by interleaving a pro-social word with an anti-social word of equal length. Examples of the pro-social words used were nice, giving, and helpful; examples of anti-social words were rude, stingy, and selfish. We found that luxury-primed participants identified significantly fewer pro-social words than non-luxury-primed participants. However, there was no significant difference in the identification of anti-social words.

This pattern of findings suggests that luxury-primed individuals were not more likely to have anti-social cognition, but were less likely to have pro-social thoughts. In other words, when thinking about luxury, people tend to focus more on themselves and less on others.

Q: Did anything in your research surprise you?

A: The findings are not so much surprising as illuminating. We expected a relationship between luxury and self-interests. However, self-interested behaviors are often conflated with those that do harm to others (e.g., selling low-quality products that might be harmful to consumers). Our second study to some extent clarifies the psychological dynamics that arise from luxury.

Luxury does not necessarily induce one to do harm to others, but simply causes one to be less concerned or considerate toward them.

Q: How do your findings help us to understand corporate greed? Do you think there is a different mindset now for companies and executives to change and become more socially and morally responsible?

A: In the midst of the current global economic crisis, people are outraged by highly paid executives living in the lap of luxury while continuing to make self-serving decisions and ignoring the plight of others. To date, more than a year since the crisis started, despite much public outrage and threats to more strongly regulate the financial industry, there do not seem to be any substantive changes in their mindset. Bankers are still planning large bonuses for themselves.

One commonly proffered explanation is that these executives lack a moral compass, leading them to care only about themselves to the extent of hurting others. Our findings offer another perspective—the fact that these executives are surrounded by luxury did not help their decision-making to be more „other-oriented.“ Yet their seemingly „immoral“ decisions stem not so much from a real desire to hurt others but more from over self-indulgence.

Perhaps besides limiting the size of bonuses, limiting corporate excesses and luxuries might be a step toward getting executives to behave more responsibly.

Q: Since your research is work in progress, do you have plans to expand your study to uncover additional findings? What would you include in future studies?

A: Yes, this is still very much work in progress. While our findings established the effects of exposure to luxury, we believe more work is required. Future research should tease out the nuances in the psychological effects of „luxury prime“ (which we have shown to promote self-interest) and „money prime“ (which has been shown to promote self-sufficiency and independence).

Toward this end, Xi Zou and I have recently completed a new study in which participants tested perfumes as part of an ostensible marketing research project. Participants were divided into two groups: In the first group, participants read about perfumes as luxury products, and in the second group, participants read about perfumes as becoming daily necessities. Both groups tested the same perfumes. We found that luxury-primed participants behaved in a more self-interested manner in that they were less likely to make contributions toward the public good. Priming luxury did not have any effect on self-sufficiency measures, suggesting that priming luxury is different from priming money.

Future research should also examine the mechanisms through which luxury goods activate self-interests. We posit that several potential mechanisms may be involved in the process. Exposure to luxury goods may activate a social norm that it is appropriate to pursue interests beyond a basic comfort level, even at the expense of others. It may be this activated social norm affects people’s judgment and decision-making. Alternatively, exposure to luxury may directly increase people’s personal desire, causing them to focus on their own benefits such as prioritizing profits over social responsibilities.

Although these two mechanisms lead to the same observed results, they have distinct social implications. As social scientists, we think it is important to understand the „why“ beneath the effects we found, and so we are currently planning more studies.

https://hbswk.hbs.edu/item/the-luxury-prime-how-luxury-changes-people

Leveraging ambition, customer input, intuition, and a keen commercial imagination, a daughter of immigrant shopkeepers created a leader in the global prestige cosmetics market. HBS professor Nancy Koehn examines the genius of Estée Lauder.

The daughter of immigrant merchants in Queens, New York, Estée Lauder, born Josephine Esther Mentzer, began selling skin cream to women in New York City beauty parlors in the late 1920s. In 1946, she and her husband, Joseph Lauder, founded Estée Lauder Cosmetics. By the time she retired from public life in the mid-1990s, this company had become one of the largest cosmetics manufacturers in the world and was recognized as one of the leading players in the global market for prestige beauty products.

When Estée and Joe Lauder started their business, their product line enjoyed little consumer awareness outside New York City. But the couple was determined to build a large market for premium cosmetics. One of the earliest and most important decisions that the Lauders made about the brand concerned its distribution. Estée believed that where her products were sold would have significant consequences for the brand’s future and the company’s larger prospects. She ruled out drugstores, supermarkets, and five-and-tens as being at odds with the upscale image that she had already created and to which she was strongly committed. Even if they had wanted to sell in chain stores, the Lauders could not afford the large sales force necessary to service such outlets. 

Because she wanted to reach women who did not necessarily have much experience with makeup, Estée believed she could not confine the Lauder line to beauty shops and other outlets that sold only cosmetics. Equally important, she thought most women would rather learn to make themselves more beautiful than pay expensive beauticians to do this. She thus eschewed the early selling strategies of Elizabeth Arden, Helena Rubinstein, and other manufacturers that distributed their products through company-owned salons.

Estée decided to focus her efforts on premium department stores. Estée had spent most of her adult life marketing directly to consumers. But in the late 1940s she and her husband began to envision the family business as a wholesale manufacturing operation with a compelling reputation.

Several issues were critical in the Lauders‘ thinking. First, they wanted to reach large numbers of middle-class and wealthy consumers, women with sufficient means to buy premium-priced products associated with sophistication and elegance. They also hoped to locate their goods in high-traffic locations, where consumers felt free to make on-the-spot „impulse“ purchases. This meant the surroundings must be beautiful, exclusive, and comfortable for consumers. Department stores were destinations that transcended the routine stops that most women made each week to the grocery store, druggist, or dry cleaners. The Lauders hoped to use the novelty and leisurely enjoyment that women connected with upscale department stores to demonstrate their products and stimulate impulse buying.

In the late 1940s, department stores had another important advantage. Most of these retailers allowed consumers to buy on credit. Many, such as Marshall Field’s, issued a store charge card to good customers.

Charge cards and other possibilities for buying cosmetics on credit were particularly attractive to Estée Lauder. At the beauty salon or drugstore counter, consumers had to pay for merchandise with cash. This, the entrepreneur believed, precluded a consumer from making a spontaneous purchase. In the late 1940s, banks did not usually provide loans for consumer purchases other than housing. There were no universal bank credit cards such as MasterCard, Visa, American Express, or Diners Club. Estée therefore targeted a small number of fine department stores that sold merchandise on credit, including Saks Fifth Avenue, Neiman-Marcus, and Bloomingdale’s.

She was not particularly interested in middle-market department stores that competed on low prices. Her objective of working with retailers known for carrying high-quality, premium-priced merchandise probably owed something to the social aspiration that drove her. Her interest in such stores was also strategic. Estée suspected that her young brand would benefit most from association with established, prestigious retailers.

Breaking Into Department Stores

How was this young, little-known company, without a large advertising budget, to break into specific prestigious stores and thereby use their appeal to help build its brand? Beginning in the mid-1940s, Estée visited scores of department store buyers. She was a determined, talented saleswoman, whose methods and commercial imagination can be illustrated by the case of Saks Fifth Avenue. That store’s buyer for cosmetics in the late 1940s, Robert Fiske, was not initially interested in Lauder’s products. At the time, the store already carried a number of established brands, such as Charles of the Ritz. When Estée told the buyer that Saks shoppers wanted her line, he responded that he and store salespeople had seen no evidence of this. „In the absence of that demand,“ Fiske said, „we’re not going to give any further consideration to your product.“ 

Estée set out to prove him wrong, telling Fiske that she would demonstrate Saks customers‘ interest in her products at a charity luncheon at which she was speaking. The event was held at the Starlight Roof of the Waldorf-Astoria Hotel. At the same time, she donated over 80 of her lipsticks to the luncheon as table gifts. Unlike most lipsticks at the time, these were housed in metal cases. Lunch guests noticed the unusual packaging and the lipstick’s color and texture. As the event broke up, Fiske recalled, „there formed a line of people across Park Avenue and across 50th Street into Saks asking for these lipsticks, one after another. This convinced us,“ he continued, „that there was a demand for the Lauder product.“ Saks placed an initial order for $800 worth of cosmetics.

The entrepreneur designed and opened the Estée Lauder counter at Saks herself. She was determined to make each sales point for the brand „a tiny, shining spa“ that whispered elegance and enjoyment for female consumers. Her signature blue color was everywhere. She chose the lighting and mirror placement carefully so they would flatter rather than intimidate women. Constructing and maintaining a cosmetics counter in a department store was expensive, as were hiring and training sales representatives, buying advertising space, creating window displays, and running regular promotions. In exchange for purchasing a given beauty line and allocating selling space to it, department stores usually expected manufacturers to bear the bulk of these expenses.

Over the next decade, Estée crisscrossed the United States talking to department store buyers. She hired an experienced saleswoman, Elizabeth Patterson, to work closely with her as she opened counters, made women up, and trained sales representatives. The work was frequently very hard, the days long, and the separation from her family painful. „One year,“ Leonard Lauder remembered, „my mother was away twenty-five weeks.“

Estée was obsessed with building the business. „I was unstoppable, so great was my faith in what I sold,“ she said, describing her weeks on the road. By the early 1950s, Estée Lauder Cosmetics was distributing products through Saks, Neiman Marcus, Bonwit Teller, and other nationally known retailers. The company also targeted department stores with a strong regional presence, such as I. Magnin in California, Himmelhoch’s in Detroit, and Sakowitz in Houston. Estée quickly developed a routine at each new store. First, she tracked consumers‘ movements in the store. For example, she „stood at the door of Saks Fifth Avenue for one whole week and watched women enter. Nine times out of ten, the first place their eyes would wander would be to the right. Not to the left. Not straight ahead.“ Next, Estée tried to obtain the best possible space on the retailer’s cosmetics sales floor. This meant placing the Lauder counter close to and to the right of the entrance to keep the brand in consumers‘ line of vision.

She spent a week at each store in which her line was introduced, devoting most of this time to working behind the counter. This included overseeing the sales representatives, tweaking the merchandise layout, and especially, talking with and touching potential consumers. „I’d make up every woman who stopped to look,“ Lauder remembered. „I would show her that a three-minute makeup could change her life.“ She also tried to create awareness of her brand outside the cosmetics department. She introduced herself to clerks who sold dresses, hats, and shoes, hoping to increase the likelihood of salespeople recommending Lauder products. She gave each saleswoman a sample of makeup or cream.

Promotion and Advertising

To draw women into a store, the entrepreneur generally worked with the advertising managers. In its early years, the cosmetics company could not afford a large, mass media campaign. Instead, Estée and department store managers sent mailings to targeted local consumers. When Lauder first began selling her products at Saks, for example, all the store’s charge-account customers received a small, white printed card with gold lettering that read: „Saks Fifth Avenue is proud to present the Estée Lauder line of cosmetics: now available at our cosmetics department.“ Introducing her brand in Neiman Marcus, she told Texas listeners in a radio interview, „Start the (new) year with a new face.“ This slogan was so successful that Estée Lauder and the retailer used it for decades as part of their annual New Year’s campaign.

By the late 1950s, the Estée Lauder brand was a recognized name among department store shoppers. The company was becoming, according to Saks manager Robert Fiske, „a very dominant factor on the cosmetics scene.“ The Lauder line, he added, „was probably the number-three treatment line“ behind those of Helena Rubinstein and Elizabeth Arden. Thousands of women understood the appeal of the Estée Lauder brand—its combination of tangible products and intangible associations such as elegance and consumer control. Estée now had momentum toward building one of America’s leading beauty companies.

https://hbswk.hbs.edu/item/building-a-powerful-prestige-brand

For companies with lots of innovation stuffed in their products, getting the price right is a crucial decision. Stefan Thomke discusses how watchmaker A. Lange & Söhne puts a price on its 173-year-old craftsmanship.

When Stefan Thomke finished writing the Harvard Business School case study on A. Lange & Söhne, he sent it to the German watchmaker for feedback. The company’s response was a first for the 25-year Harvard Business School professor: The executives had a question about photos used in a case exhibit.

„We looked at the diameters, and then we actually measured the size of four pictures, and we noticed that the relative sizes of the pictures don’t match the relative size of the watches,” Thomke remembers them saying. “I mean, the diameters range from 38.5 millimeters and 41.9 millimeters, so I don’t know how they noticed this. However, this says a lot about who they are. They go into tiny details and make sure that everything is perfect.”

Perfection and precision are at the heart of A. Lange & Söhne, which produces luxury wristwatches containing hundreds of parts. They make some of the building tools themselves because commercial ones aren’t precise enough. Every watch is hand assembled, twice, in the German workshop. When the first assembly is complete (and working fine), the watch is taken apart, every part cleaned and finished again. A second assembly allows watchmakers to put the most pristine parts, screws, and oil in the perfect locations.

“WHEN YOU THINK ABOUT CAPTURING VALUE FROM INNOVATIONS, PRICING IS QUITE POSSIBLY THE MOST IMPORTANT DECISION THAT YOU’LL EVER MAKE”

Prices for A. Lange & Söhne products start around $16,000 and climb all the way to $2.6 million for its limited edition platinum Grand Complication, which takes one year to craft.

Capturing value from innovation

The company seemed a perfect model for a study in how to price products. Mainly, how do you think about setting a price for something that is incredibly difficult to produce, full of innovation, and where only a relative few might be manufactured?

“When you think about capturing value from innovations, pricing is quite possibly the most important decision that you’ll ever make,” says Thomke, the William Barclay Harding Professor of Business Administration at Harvard Business School. “My sense from teaching many years is that this was a very interesting issue for executives because companies often don’t get it right.”

A watch connoisseur himself, Thomke had been aware of the company for many years. Not flashy and not mass produced, the watches rank among premier brands such as Patek Philippe, Audemars Piguet, and Vacheron Constantin.

Thomke and coauthor Daniela Beyersdorfer, associate director of the Harvard Business School Europe Research Center, had unfettered access to the usually secretive Lange & Söhne’s operations, its executives, and the watchmaking shop. Thomke and Beyersdorfer even took turns as watchmakers. “It’s really, really difficult,” he says.

“It’s really, really difficult.” Stefan Thomke and Daniela Beyersdorfer try assembling watches at A. Lange & Söhne.

Is the price right?

While conducting his research, Thomke saw company executives debating how to set the price for its latest innovation, the Richard Lange Jumping Seconds watch. The CEO, head of production, and head of product development all had an equal say in pricing the limited edition platinum watch.

The dilemma they faced is not uncommon in other industries: Underprice an innovation, and you leave profit on the table. Overprice an innovation, and you may not be able to sell it.

Price discipline is another critical issue. “It’s very difficult to start with a high price and then go down because your customers will get very upset,” Thomke says. “Imagine you’re buying a car, and then you find out six months later that the car will cost 25 percent less. It’s terrible.”

The perceived value of an object by buyers is essential, especially if you look at customers as relationships rather than transactions. In those situations, companies may want to „gift“ some of the value and not charge as much. For innovative products, the thinking gets even more complicated.

“Usually when you price, you have reference prices because you have comparable products on the market,” Thomke says. “But when you’re creating something that’s really new, often there are very few references. There are no anchors here. So the perceived value or perception then becomes an important factor, and by pricing you can shape perceptions.”

„UNDERPRICE AN INNOVATION, AND YOU LEAVE PROFIT ON THE TABLE. OVERPRICE AN INNOVATION, AND YOU MAY NOT BE ABLE TO SELL IT“

Often companies take the lazy way out, Thomke says. They look at their costs and the margin they need to make, and bingo, there’s the price.

The Richard Lange Jumping Seconds watch. (Courtesy A. Lange & Söhne.)

Even though there was no direct reference, innovations like Jumping Seconds have to follow a general roadmap. The product needs to fit into a company’s price hierarchy and also the rough price hierarchy

of competitors and the market in general. And in the watch’s case, the fact that it was a limited edition of only 100 pieces added another wrinkle.

“Some strategic considerations need to go into this,“ Thomke says. He prefers not to reveal the final price settled on by the company, in order to promote a more lively discussion during class. Let’s just say it’s expensive.

While Thomke’s case study is ostensibly about how to price innovative products, the pricing serves as a trigger point for his classes to start broader discussions about how to grow a sustainable, profitable business. They need to weigh what Thomke calls the P’s: production, pricing, products, and productivity. It also raises the question of whether they want a company that is product-centric or customer-centric, and how they maintain a link to their past.

„IT’S ONE OF THE VERY FEW COMPANIES IN THIS WORLD THAT WAS STARTED—AND REACHED THE TOP OF ITS INDUSTRY—TWICE“

“There is this balance between [being] innovative, but also you want to be connected to tradition and history. When you look at iconic products, they all have that,” Thomke says, pointing to the Porsche 911, which has changed the technology under the hood but maintained its basic shape. “It’s about evolution rather than revolution.”

The company that started twice

That’s especially true for a company with a rich history like A. Lange & Söhne., founded in 1845 in the village of Glashütte, Germany. It began making precision pocket watches that eventually became world famous. After World War II, the East German country expropriated the company and others like it. Walter Lange, third-generation watchmaker, escaped to West Germany. Some 40 years later, following the country’s reunification, the then 66-year-old Lange returned to Glashütte and began again from scratch.

“Lange started this at an age when most people in the world retire,” Thomke says. „Then kind of like the phoenix rising from the ashes, they started again, and within just a few years they had built this amazing watch company. It’s one of the very few companies in this world that was started—and reached the top of its industry—twice.”

While the company is unique in many ways, it holds some general lessons for owners and managers, says Thomke, who used the case in executive education and plans to teach it again this fall. A top company executive plans to attend.

“The case can teach us a lot about how to create an organization that is all about perfection and excellence, an organization that values tradition and history,” Thomke says. “And it also tells us something about entrepreneurship, regarding how you can take something that essentially was destroyed and within a few years make products that are among the best in the world,” Thomke says.

https://hbswk.hbs.edu/item/how-would-you-price-one-of-the-world-s-great-watches

Brian Kenny: According to Orbis Research, the global cosmetics industry is worth upwards of $530 billion and will climb to more than $800 billion over the next five years. What’s driving such rapid growth? In a word, vanity.

Aging baby boomers, including men, want to look younger. And selfie-obsessed digital natives are spending 25 percent more on cosmetics than they did just two years ago. Don’t forget the rising middle class with expendable income in China and India. People want to look good, and they’re willing to spend good money for the next surefire anti-wrinkle cream or the latest organic lipstick, but it wasn’t always this way.

Cosmetics have been around for centuries, but for much of that time, they were only available to the highest echelon of society. In some cultures, it was forbidden for common people to wear makeup. In America’s old Western saloons in the 1800s, prostitutes were known as painted ladies for the abundance of rouge and lipstick they wore. So, how did we get from there to here? Today, we’ll speak with Professor Geoff Jones about his case entitled, Helena Rubinstein, Making Up the Modern Woman. I’m your host Brian Kenny, and you’re listening to Cold Call.

Geoff Jones researches the history and impact of globalization. His focus is on the role of entrepreneurs and business enterprises. He is a prolific scholar and author of several books including Beauty Imagined: A History of the Global Beauty Industry, and that is very appropriate for today’s conversation. Geoff, thanks for joining us.

(Read more: https://hbswk.hbs.edu/item/how-helena-rubinstein-used-tall-tales-to-turn-cosmetics-into-a-luxury-brand)

Good news for makers of $20,000 watches and other luxury goods and services. Recent research from Harvard Business School professor Anat Keinan and a colleague suggest that we often regret not indulging ourselves earlier in life. Key concepts include:

• People can be too farsighted, or hyperopic, leaving wistful regrets of missing out on life’s pleasures when they look back at how they spent their time.
• It’s possible to motivate consumers to indulge themselves by simply asking them what they think they will regret in 10 years.
• Marketers can convince consumers that buying their product is actually a farsighted behavior, an investment in future memories.

We all know the moral of Aesop’s fable about the industrious ant and the fun-loving grasshopper: Work now and save for the future, or else regret the consequences. And who hasn’t been confronted with a similar dilemma? You know you should work late to finish that project, but an old friend is passing through town for one evening and hopes you can have dinner. What to do?

(Read more:  https://hbswk.hbs.edu/item/indulgence-vs-regret-investing-in-future-memories)

In these uncertain times, luxury-goods companies must take action to “navigate the now,” plan for the recovery, and shape the future.

Amid the coronavirus pandemic every company’s first priority is, of course, to protect the health and safety of employees, consumers, and business partners. Indeed, luxury companies have pivoted to address urgent public-health needs: factories that produced scarves and perfume now manufacture face masks and hand sanitizer, and many luxury groups have made monetary donations to hospitals and other not-for-profit organizations. At the same time, with millions of people relying on the luxury-goods industry to make a living—from factory workers and retail-store employees to small-town artisans and craftsmen—industry leaders are planning ahead and wrestling with longer-term strategic questions to ensure the survival of their businesses.

In this article, we discuss the impact of the crisis on the luxury-goods sector. We then recommend two sets of priorities for industry executives: short-term actions for “navigating the now” and longer-term considerations for shaping the future.

A hard reset or a short-term blip?

While it’s too early to quantify COVID-19’s total financial toll on the sector, the pandemic has certainly shaken some of the foundational aspects of the luxury industry—and some of these changes could be permanent.

Wholesale Darwinism. Even before the pandemic struck, independent luxury-goods wholesalers in Europe (many of which are small, family-owned boutiques) and some of the large North American luxury department stores were already struggling—in part because of luxury brands moving to vertical integration over the past 20 years and, more recently, the growth of e-commerce. This pandemic might force some of them out of business. The damage could extend to brands that have not yet fully transitioned to a vertically integrated distribution model, as well as to upstart brands that need wholesale channels to reach new customers and to finance the development of their full collections. To survive, wholesalers are likely to adopt aggressive commercial and discount policies—which, at least in the medium term, could hurt the luxury positioning of brands that don’t have a concession model.

From global traveler to local shopper. The luxury sector appeals to a global consumer: 20 to 30 percent of industry revenues are generated by consumers making luxury purchases outside their home countries. In 2018, Chinese consumers took more than 150 million trips abroad; we estimate that purchases outside the mainland accounted for more than half of China’s luxury spending that year.¹ Asian shoppers buy luxury goods outside their home countries not only to benefit from lower prices in Europe, but also because shopping has become an integral part of the travel experience: buying a brand in its country of origin comes with a sense of authenticity and excitement. With the recent travel restrictions, an important driver of luxury spending has come to a halt, and we anticipate only a gradual ramp-up in international travel, even after the restrictions are lifted. That said, Chinese consumers remain the biggest growth opportunity for the luxury sector. Brands, clearly, will need a new approach to attracting luxury shoppers. To reactivate Asian luxury consumers in their home countries, brands can focus on creating tailored local experiences, strengthening their digital and omnichannel offerings, and engaging more deeply with consumers in tier-two and -three cities. The latter will be challenging, given the limitations in both retail infrastructure and customer-service capabilities in those cities.

(Read more: https://www.mckinsey.com/industries/retail/our-insights/a-perspective-for-the-luxury-goods-industry-during-and-after-coronavirus#)