Chapter 1
Introduction

Definition and Crisis of Luxury

Luxury has a long and fascinating history. It is apparent in artifacts from the Egyptian period of lavishness, from 1550 to 1070 b.c. Another great wave of luxurious lifestyle occurred during the Italian Renaissance, an era of great painters, sculptors, and architects during the fourteenth through sixteenth centuries a.d. This was followed by the reign of King Louis XIV of France (1638-1715), whose reign expressed an authentic French lifestyle. Then came Charles Frederick Worth (1825-1895) of Great Britain, a designer who created the concept of haute couture. Worth moved to Paris in 1846 to perfect and then commercialize his craft, holding the first fashion shows and launching the use of fashion labels. Coco Chanel (1883-1971) and Christian Dior (1905-1957) gave birth to modern fashions and ideals, marked by the rise of New York City as a luxury capital. The 1960s and 1970s then experienced the second Italian luxury revolution. Gucci and Bernard Arnault started applying the principles of strategic management to modern luxury by building the first multibrand conglomerate, Louis Vuitton Moët Hennessey (LVMH) group. The latest chapter to this fascinating tale of luxury and high fashion is the information technology revolution, in which news about a new product spreads like wildfire and opinions on brands, products, and companies are shared at the click of a button. The story of the evolution of luxury is really about the evolution of society.

Countries evolve through various phases of luxury consumption. The first stage is deprivation, in which a country is crushed by poverty, which builds in the populace the desire to consume. As soon as the country manages to free itself from the shackles of deprivation and witness economic progress, its citizens are lured into buying luxuries that have high functional utilities, like washing machines, cars, and practical appliances. Then the wealthy and elite start buying luxury products. The third stage of development is marked by the desire of citizens to show their wealth: Mere possession is insufficient when luxury goods become a symbol of social status and bestow their owners with an aura of divinity. Then comes a stage in which most people in the nation are well-off and have sufficient resources; however, they have a need to fit in with their group. If someone is not carrying or wearing an appropriate social marker, they might find it hard to fit in with a particular group. Finally, luxury becomes a way of life. When people become used to this lifestyle, it becomes difficult for them to go back to their previous habits. Here luxury is more and more associated with personal tastes and pleasure, and not necessarily with wealth or status.

Issues of Defining Luxury

It is important to understand why certain brands are called luxury brands and what justifies the superior positioning they command. Luxury empires are not built by selling tasteful products at an exorbitant price. Luxury brands have been carefully crafted through meticulous strategies in marketing and brand building, making their mark in the consumer's subconscious and having the following main characteristics: brand strength, differentiation, exclusivity, innovation, product craftsmanship and precision, premium pricing, and high quality.

It is the differentiated quality of the material, design, and performance of a Patek Philippe watch that merits a 1,000-percent premium over a normal watch picked up from a general store. It is the craftsmanship that goes into the Kelly bag made by Hermès that justifies its exceptionally high price tag. It is only the brand strength of Louis Vuitton that can entice customers to preorder bags months in advance. It is attention to craftsmanship and nuances of details that help differentiate a luxury product.

Many misconceptions exist that surround the luxury industry: (1) Do luxury and fashion mean the same thing? (2) Does a high price imply a luxury product? and (3) Does luxury imply perfection?

Luxury and fashion do not mean the same thing; they can coexist, but that's not always the case. Until the nineteenth century, only the very privileged few could afford to keep up with changing trends. So only those who could bear the cost of luxury could afford to make and follow fashion. However, the twenty-first century consumer doesn't need to be wealthy to be fashionable; being trendy no longer needs to be costly. For example, streetwear brands produced by H&M and Zara are fashionable and affordable. Haute couture is still the trendsetter but is not the only reference anymore. Luxury products used to be seen as investments, which are not replaced that often, but now they have become more of a lifestyle choice. Many luxury houses try to release fashionable products along with their traditional luxury goods. For instance, Chanel offers fashionable products in order to keep up with the times and renew interest in their classic items.

If one pays a high price for an item, that does not mean that the product is a luxury good. Everyday products could trade up and charge a higher price. All luxury products are expensive, but not all expensive products are luxurious. This means that it is difficult to sell premium products as luxury goods-a phenomenon known as "premiumization" or "trading-up." Similarly, it is unwise to reposition a luxury brand as a premium product to extend its market. Automobile companies have tried to reposition products both ways and have failed, such as Mercedes with both the launch of the Smart car and its acquisition of Chrysler. It had to launch Maybach. In the meantime, BMW traded-up to the 6 and 7 series together with trading-down to the BMW 1-series. Toyota and Nissan, on the other hand, launched the Lexus and the Infiniti from the very beginning. Porsche gained a significant market share with the launch of Cayenne in 2002, but in the meantime it suffered a lot of complaints from its loyal customers about the degrading of the brand image. When one pays a tidy sum to procure a luxury brand, what does he or she pay for? Perfection? Not necessarily. In some ways, what defines the luxury brands are the creators and not the consumers. A luxurious product may thus be far from perfect. However, would these characteristics be questioned in times of a recession, when consumers become more cautious, have a limited budget, and spend less?

Crisis

-Karl Lagerfeld

There were several economic crises during 1970s to 2014, starting with the oil crises in 1973 and 1979, the stock market crash in 1987, the 1992 Black Wednesday crash, and 1997's Asian financial crisis. The first 10 years of the twenty-first century also saw many crises. The stock markets collapsed in early 2000, following the dot-com bubble of the late 1990s. In 2001 the world watched as the terrorist attacks in New York and Washington took place, followed by the war in Afghanistan in 2001 and the invasion of Iraq in 2003. The early 2000s also saw a recession in many countries of the world, aggravated by the outbreak of SARS in Asia in 2003. In 2004, the tsunami in Asia killed hundreds of thousands. Finally, in 2007 the subprime mortgage crisis that began in the United States housing market spread all over the world and caused, among many other things, the collapse of Lehman Brothers and the European debt crisis of 2011, which continues to have effects such as the Cyprus bailout and political turmoil in Russia and Italy.

Crisis can essentially be of four forms: (1) endogenous (inner), such as economic and financial crises; (2) exogenous (outer), such as a political crisis; (3) natural disasters; and (4) mixed characteristics. An economic crisis is one where the real economy, of one country or worldwide, experiences a significant slowdown. The gross domestic product consumption stagnates or shrinks, along with investments, capacity utilization, household incomes, company profits, and inflation, while bankruptcies and unemployment rates rise. Figure 1.1 shows periods of shrinking GDP between 1950 and 2013 using the example of the world's biggest economy, the United States.

Figure 1.1 Quarterly GDP Growth in the United States, 1950-2013 (in percent adjusted for inflation)

On the other hand a financial crisis is a sudden devaluation of assets, such as stocks or currencies, which may or may not have an effect on the real economy. In itself, a financial crisis only leads to the destruction of paper wealth. It has been observed that there is a reciprocal relationship with other types of crises, such as economic crises and political crises, which is the reason why financial crises generally lead to increased levels of caution within politics and the real economy. Examples of such financial crisis are the burst of the dot-com bubble, together with the September 11, 2001 terrorist attacks, the subprime crisis of 2007, and the ongoing Eurozone debt crisis facing the world, transforming from the private debt property bubble of 2008-2009 into the sovereign debt crisis of major banks and economies of Europe, in which the Dow Jones lost about 50 percent of its value. Other such crises that affected the world include the South American debt crisis of the 1980s, known as the "lost decade"; the Asian financial crisis of 1997; the Russian crisis of 1998; and the European debt crisis that started in 2010...