James Lawson, director of Ledbury Research, explores the recent re-evaluation of international footprints by luxury brands and financial institutions
Alfred Dunhill have left the Argentinian market until conditions become more conducive to growth
2012 has seen a number of global brands retrenching, in both the luxury and financial spheres. A recent high profile example is the sale of Merrill Lynch’s wealth management business to Julius Baer. However, similar disposals have been made by the likes of Credit Suisse and the private banking arms of Societe Generale, Lloyds TSB and HSBC.
What we appear to be seeing is the end of the age of loss-leading expansion into new markets, or “non-core” business areas, subsidised by established success elsewhere.
HSBC’s five filters test typifies the rationale behind these withdrawals: a focus on profitability, efficiency, liquidity, economic development and “connectivity” with other elements of the business. In essence, what would have been viewed in optimistic times as expansion is now warily regarded as being spread too thin.
“ The end of the age of loss-leading expansion into new markets or “non-core” business areas ”
The growing cost of regulatory compliance and pressure to strengthen balance sheets has played a role in this cost-cutting exercise. In addition, the uncertainty of future policy also acts to encourage these defensive de-leveraging strategies.
Whilst regulatory and recapitalisation requirements do not apply directly to prestige brands, the recent withdrawals we have seen in wealth management are largely driven by politics rather than pure market conditions.
The implementation of governmental import restrictions in Argentina has led to an exodus of global luxury brands, such as Ralph Lauren, Calvin Klein, Cartier, Kenzo and Emporio Armani. Combined with high import taxes and tightened currency restrictions, Argentina has become a difficult place for foreign brands to conduct business.
“ The implementation of governmental import restrictions in Argentina has led to an exodus of global luxury brands ”
Conversely, the Indian government has disappointed some in not pushing ahead as aggressively as once hoped with economic reforms. This has caused several notable early entrants to re-think their strategies, or withdraw entirely.
For example, in July Alfred Dunhill announced they would be exiting the market until conditions become more conducive to growth. Inadequate supply of luxury retail infrastructure has made it difficult for brands to build scale or offer the luxury shopping experience that wealthy Indians are accustomed to when shopping abroad.
Brands hoping to maintain first mover advantage in India have had to find a way to make their brands more relevant to the market – for example, by introducing limited edition lines specifically for India, or by employing new distribution channels, such as bringing the store to the customer’s home.
“ Global brands have discovered that the same operating model does not work everywhere ”
Global brands have discovered that the same operating model does not work everywhere. Conditions and challenges vary by market and the current climate has forced players to decide where their efforts are reaping the most reward.
For some, the potential in a new market outweighs the cost of having to adapt to it, but for others, the market they can gain the most from is the one on their doorstep.
To further investigate luxury brand strategy on Luxury Society, we invite your to explore the related materials as follows:
- Luxury M&A; Goes Vertical
- Diageo Defies Slowdown with Super Luxury Spirits
- Challenges Remain for Luxury Brands in India
