6. Demographic Change and Luxury

By Andrian Mechernich

Demographic change does not stop short of luxury enterprises. Our societies are ageing rapidly. In the future, it will be imperative for successful luxury enterprises to understand these changes and to respond with the right management of differentiated customer experiences. Moreover, there will be enormous opportunities offered.

In Europe, the proportion of people older than 60 years of age is set to grow rapidly: from 24% to 34% by 2050. In Asia, it will more than double from 12% to 25%. Worldwide, this share will also be twice as high by 2050: from 901 million to 2.1 billion over 60-year-olds. And the number of people older than 80 will more than triple: from 125 to 434 million in 2050 (United Nations, 2015).

This sharp change brings many implications for enterprises. An example: Consumption patterns will change markedly and, above all, continue to diverge. 23.8% of 1900 enterprises surveyed in Germany reported that the demographic change already exerts a change in demand patterns among their customers today (IFOK, 2010).

Demand patterns are especially important for luxury enterprises, as the luxury market is completely determined by demand. This does not include normal items of everyday use, but luxury, which is highly dependent on personal preferences, fashions or the predominating spirit of the times. It is therefore especially important for luxury enterprises to precisely know their customers and their behaviour and to react consistently to changes. The increasingly divergent customer behaviour – caused by demographic change – culminates in new customer values, the most diverse customer needs and evermore heterogeneous purchasing behaviour. For luxury enterprises, this means, above all, increasing complexity. There is a need to create customer experiences for increasingly heterogeneous customer groups.

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The increasingly divergent customer behaviour culminates in new customer values, the most diverse customer needs and evermore heterogeneous purchasing behaviour.

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While there is an increasing number of older people deeply rooted in their domestic traditions as well as many young traditionalists, there are also modern people like globetrotters, borderless customers or generation Y (the generation born in the 1980s and 1990s). Satisfying all these different stakeholder groups with different needs and values is a complex task. Correctly implemented, the task offers enormous opportunities for luxury enterprises.

An extraordinary opportunity is presented by the growth of potential new and existing customer groups. On the one hand, the growth in the proportion of older people who presented an important customer group for luxury enterprises in recent times. In Western European countries, the over 40s constitute over half the customers of luxury enterprises; the 20 to 39-year-olds (still) only represents 38% however (Bouee, 2012). This means that older people are an important customer group, especially in the developed countries. The loyalty of this customer group needs to be secured and expanded by means of the appropriately tailored customer experiences.

On the other hand, there are also younger generations that are becoming increasingly important for luxury enterprises. Particularly in developing and emerging countries, these young generations are very important for luxury enterprises. Take China, for example, where the 20 to 39-year-olds constitute 60% of luxury customers: this means that younger generations are the target group prioritised by luxury enterprises. The group of over 40s only makes up 35% (until now) (Bouee, 2012). Younger generations need to be paid the right attention with the appropriate customer experiences. This generation, more than others, also offers high future potential, as once they are luxury customers they can be retained over the entire lifecycle through to old age.

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For sure, demographic change offers opportunities for both groups: in the development and retention of new generations and in the expansion of scope of the older generation. Generally, there is an increasing level of luxury affinity observable across all age groups (Meisterkreis and Roland Berger, 2012).

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Besides these opportunities, there are also some risks which need to be addressed for a successful luxury enterprise. The management of diverse customer needs for an increasingly heterogeneous customer group raises many challenges. The requirements placed on staff, for instance, are becoming increasingly higher. The sales personnel are ambassadors of the company and have to satisfy older as well as younger people with different values and needs. Generation Y or the digital natives approach the luxury enterprise with completely different preconditions than older people. The sales staff must be able to offer both generations an appropriately differentiated customer experience. Furthermore, the specialist knowledge of the respective employees has to improve continuously, as customers are already very well informed, because digital natives in particular have already found out about the desired product on the Internet before they come into the boutique.

A further risk of demographic change is the disappearance of customer groups due to reduced customer retention. The ageing generations show different consumption behaviour and there may no longer be a demand for more luxury goods above a certain age (Müller-Stewens, 2013)

Another risk not to be underestimated is the high investment requirement. Many luxury enterprises spare no expense in meeting diverse customer needs. Thus, the investment in the boutiques is very high. But investments in information systems are often just as high (such as a new online store, new CRM system). For example, Burberry has invested greatly in its new flagship store “Burberry World” in London’s Regent Street, especially also in a digital concept with innovative audio-visual customer experience. This illustrates the high efforts already taken by leading luxury enterprises to satisfy heterogeneous customer groups. New ideas, such as digital concepts, attract digital natives, but still secure older customers’ loyalty.

This approach also involves the risk of losing the brand identity or dilution of the customer experience. If there is a wish to satisfy too many heterogeneous customer groups, the risk exists that loss of the brand core, which every successful luxury enterprise needs, threatens. The luxury market then degenerates to a mass product.

There are several approaches to exploit the opportunities of demographic changes and to minimize the risks by offering a differentiated customer experience to the customer. On the one hand, advertising campaigns should be tailored to the different customer groups. Louis Vuitton, for instance, build upon collaborations: a campaign with the Final Fantasy series of computer games – not exactly something you would expect from a luxury brand – specifically addresses a younger target group. Alongside, there are also more classical campaigns. There are also events that address all customer groups. Fine tea tasting from Mariage Frère that appeals to both young and old alike is another example. Here the younger generation is skilfully addressed without excluding the old customer group.

A further possibility lies in adapting the product portfolio for different customers. At Louis Vuitton, there is discreet product modification to appeal to specific tastes. An example is that the rivets on bags are gold coloured and no longer classic silver coloured. Or there are limited editions, which often build upon classical versions, but are far more colourful. This reaches out selectively to younger people without watering down the brand core, i.e. classically discreet luggage.

In order to address the increasingly important generation Y, even more should be invested in e-commerce and the online brand experience. Older people are also increasingly using these channels. In fact, 30.4% (20.6% of 50 – 69-year-olds) of respondents in a consumer survey said they had already bought a luxury product online (LINK Institut, 2011). This market has been characterised by rising growth rates for many years.

As presented in the previous example of Burberry, investments in the shop experience worlds and the service level are indispensable. Because they are the flagship of the brand and offer huge potential for offering the customer a differentiated experience. At Louis Vuitton, the differentiated customer experience goes so far that even the confectionery and the tea are tailored to offer a unique experience, which raises it above its competitors.

Experience-based luxury is important in order to counteract the risk of losing older customer groups. Above a certain age, customers may not feel the urge for luxury goods. They place greater importance on services. Similarly, the younger generation Y, which is less possession-oriented than experience-oriented, loves the “luxury experience”. This is why luxury enterprises should increasingly diversify towards services and immaterial luxury. Louis Vuitton or Armani do this, for example, by investing in hotels.

But successful luxury enterprises still need to concentrate on their core values, to avoid a disintegration of brand identity. Only those are successful that manage to tread the fine line between gaining new customers and retaining old customers, between access to the brand and exclusivity.

Demographic change is a mega trend that does not stop short of luxury enterprises. Following the appropriate management approaches and considering the risks offers enormous opportunities. Some effort is needed to create differentiated customer experiences for different customer groups. However, those who master this are rewarded with a large number of new buyer groups. Besides the western – over-aged – countries, particularly the new younger buyer generations in the Asian region offer opportunities. The typical luxury customer is far younger here. However, these countries, especially China, are faced with transformation into an older society. Recognising this trend and focussing on an increasingly heterogeneous customer group promises success.

Author


Adrian Mechernich

LinkedIn

 

 

Bibliography

 

Bouee, Charles-Edouard. “Chinese Consumer Report – Luxury.” 2012. https://www.yumpu.com/en/document/view/48770474/chinese-consumer-report-2012-luxury-roland-berger, accessed January 31st, 2017.

IFOK. “Auswirkungen des Demographischen Wandels auf Unternehmen.” 2010. https://de.statista.com/statistik/daten/studie/173235/umfrage/auswirkungen-des-demografischen-wandels-auf-unternehmen/, accessed January 31st, 2017.

LINK Institut. “Luxusprodukte – Einkauf über Onlineshops.” 2011. https://de.statista.com/statistik/daten/studie/208148/umfrage/umfrage-zum-einkauf-von-luxusprodukten-ueber-einen-online-shop/, accessed January 31st, 2017.

Meisterkreis, and Roland Berger. “2011 – Der Deutsche Luxusmarkt wächst rasant.” 2012. http://www.cpwissen.de/tl_files/pdf/STUDIEN/Roland_Berger_Luxusstudie.pdf, accessed January 31st, 2017.

Müller-Stewens, Günter. “Das Geschäft mit Luxusgütern.” 2013.

United Nations. “World Population Prospects, The 2015 Revision.” 2015. https://esa.un.org/unpd/wpp/Publications/Files/Key_Findings_WPP_2015.pdf, accessed January 31st, 2017.

 

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