Part 1: Gen Z goes mainstream and disrupts luxury
Now that 2020 is here, I’ll start to predict how luxury will evolve over the next decade. The last five years have been characterized by some of the biggest changes the luxury market has ever seen—and in the shortest time frame. Entire industries are being challenged like never before and need to rethink how they do business through 2030.
Luxury car brands have been disrupted by electrification and the shift away from owning to sharing in cities around the world. Luxury fashion has been disrupted by “social currency” and trends that emerge and disappear faster than ever before. Luxury travel has been disrupted by the search for meaning and new experiences that established companies have a hard time delivering. Luxury watchmakers have been disrupted by the increasing threat of smartwatches. And luxury jewelry has been disrupted by fewer marriages worldwide, meaning fewer engagement and wedding rings. Do you see a pattern here?
Chinese consumers have become the most important worldwide—now accounting for 40% of the entire luxury market. They have a different profile than Western consumers: They’re generally much younger (25-30 is the sweet spot), highly-educated and sophisticated, have high expectations, and are digitally native. But this doesn’t mean stores are obsolete to them. In fact, the opposite is true. But a store can’t just be a transaction place anymore. It has to create a unique experience to have relevance with young consumers.
I have written a lot about the need for brands to change their methodologies to successfully master these new challenges, but nothing companies have experienced to date will compare with is coming over the next decade. We live in accelerated times, and the speed of change will only continue to accelerate. What made managers uncomfortable during the last five years will feel like a relaxing period when people will look back ten years from now.
A big shift is coming courtesy of Generation Z. Most luxury brand CEOs will admit privately that they have a hard time connecting with millennials (consumers that are currently between 20 and 40 years of age). Yet those millennials are now the top group for luxury purchases worldwide, particularly in China, and that is threatening many brands’ existence. But the news doesn’t get any better for these brands because, in ten years, Gen Z will be on the verge of dethroning millennials as the most important luxury consumers—and they’re even more demanding!
Gen Zers grew up digitally connected. Their rite of passage won’t be their first car—it will be their first smartphone. Their life is entirely digital, and many Gen Zers are already tired of sharing their life on Snapchat or generating content for Instagram. No generation has ever felt so much pressure to share moments, talk about them, and receive social confirmation. I sometimes call them the “content creation” generation, the first generation to experience a lifestyle that’s about social currency, social scores, and social recognition. This creates pressure and the desire to “escape,” and the role of luxury is to offer escapes.
This is why branded experiences become more important than anything else. For previous generations, luxury brands could get away with flawed experiences as long as they could make consumers believe that their quality, craftsmanship, and heritage was better than the rest. Those times are over. Quality is simply expected now, and consumers know that whatever is the latest technology today will be replaced by something better in less than a year. That leaves experiences as the area for a competitive advantage. In 2030, when Gen Zers will account for the largest chunk of luxury spending, the ability to create a differentiating experience for that group will determine the fate of brands and companies.
Experience creation requires completely different skills than what most brands were traditionally excellent at. It requires a much more holistic approach where the customer is in the center of all strategies. Today’s companies are mostly product-driven rather than story-driven. Companies of the future have to build a strong brand story first and then create branded experiences from that story. Looking at today’s leading luxury brands, only a handful are fully prepared for this challenge. Radically different approaches will be necessary.
First, brands must adapt to their fast-changing consumer insights. As the speed of change will accelerate exponentially, classic market research will completely lose relevance, and real-time insight generation technologies will take over. Artificial Intelligence will evolve from a buzzword to a minimum necessity, and the ability to make sense of millions of data points will be the difference between success and failure. This is the competitive advantage of the future.
Second, insights need to lead to much faster and more precise actions compared to what brands do today. They need to generate relevant content that is authentic because content may change by the day or even by the hour. Therefore, precise branding and brand storytelling must improve drastically. Rarely is a brand’s story precise enough today, and by 2030, imprecise brand storytelling will make brands obsolete. Many established brands will not survive the transition to Generation Z, as they will have to compete with a lot of new, Gen-Z-focused brands. Initially, these might be indie or niche brands, but over time the sheer volume of these new brands will change the game. As they are born, they’ll come with new ideas, and many could originate from China to conquer the luxury world from China. Because of these brands, half of the current top-10 luxury brands won’t exist in ten years.
What those brands will have in common is the ability to connect with Gen Zers in an authentic, relevant, insight-driven, and content-focused way. Those brands will have a very precise brand story that combines rational framing with an emotional core. They will excel in optimizing the customer journey and making it distinct. This will create differentiated, highly relevant, and shareable experiences.
This is what luxury was always about: creating a once-in-a-lifetime experience and establishing an emotional relationship with a customer. In its purest form, luxury is like a romantic relationship. It is intense and emotional. It creates desire, intimacy, and a sense of belonging. Does your luxury brand provide this love relationship today at every touchpoint? If the answer is no, your brand might not survive over the next ten years.
Part 2: The rise of purpose-driven brands
In the second part of my preview of where luxury is heading over the next decade, I will focus on purpose-driven brands. I’ve written a lot about luxury brands needing to refocus on creating brand equity and brand storytelling. These aren’t fluffy or optional—they’re the essence of a brand, its values, and what it stands for. In the future, getting the story right won’t simply be about increasing a luxury brand’s reputation, it will be a critical measure that’s necessary for survival.
Why do people pay enormous price premiums for the best luxury brands? The answer is simple: Those brands create at least the same amount of value as the prices they charge. If a customer is willing to spend $4,000 for a Louis Vuitton or Gucci handbag or $5,000 for a Cartier ring, then those prices are the perceived values of those brands. Yes: The bag or ring’s design and materials are contributing factors to their prices, but the majority of an object’s value is created by the brand, not by the product’s functional value or its features. Still, many brands focus predominantly on products and neglect to build brand equity. And while some might have been able to get away with that over the last decade, they won’t be able to in the next one.
The past few years have already shown a clear tendency towards ultra-premiumization, which will help push average brands out of business even faster. The average prices of the leading luxury brands in every category have significantly increased, and there’s been an emergence of new brands and product lines offered at dramatically higher price points than we’ve ever witnessed before. If you look at the beauty care segment, for example, the sheer number of brands priced above $500 for their main items has skyrocketed, and this was a price point that seemed unreachable just a few years ago. The lesson? When brands offer enough perceived value, consumers are willing to pay for it.
This trend is only going to increase. The cost and complexity of market entry for new brands have decreased dramatically thanks to digital channels, which is leading to an unprecedented increase in competition—even at the highest end of the luxury market. While there were few top-end brands available in the past, we will see many by 2030, and they’ll come from all over the world. Chinese luxury brands will conquer the global market and challenge Western brands, as they’ll be much better prepared for the needs of Chinese luxury customers than their Western counterparts. In ten years, when over 50% of global luxury consumption will come from China or Chinese customers purchasing abroad, neglecting the quickly-evolving needs of Chinese customers will be costly. To reach them, real-time insights into their conversations, preferences, and needs from advanced A.I.-powered analysis is needed, and in the future, those insights will be an absolute must.
The only way to gain, maintain, or extend a competitive advantage by the new reality of 2030 will be to focus on brand equity building, which includes defining the brand’s purpose. This sounds trivial or like it should be easy, but in reality, most brands are incredibly weak at describing or expressing their purpose. Very few brands were clear about their purpose during our recent brand audits. At best, they had a vague idea, but one that rarely translated into tangible customer benefits. A lot of brand definitions today are merely self-descriptive. In other words, the brands talk about themselves rather than the value they create for their customers.
Even worse, if a value definition does exist, it often gets lost during customer interactions. For instance, I audited the shopping experiences of several top luxury leather goods brands last week, and the results were eye-opening: All the experiences felt the same, regardless of the brand. Despite being filled with customers before the holidays, their stores felt more like cheap warehouses than a luxury experience, with long waits and no refreshments served. There was nothing special about the purchase situation, and these are the top luxury brands in the entire world! These types of experiences simply won’t be accepted in luxury by 2030.
With the continued rise of Chinese customers, the average age of luxury consumption will drastically decrease. Young millennials and Gen Zers will account for the majority of luxury consumption in ten years, and women will be the most important gender in making purchase decisions. These customers expect brands that resonate with them and know their preferences. Having a beautiful product won’t be enough. The purpose of the brand is what will matter most. What are the values of the brand? Is the brand true to its values? Or, are the values just on paper? Social media will only increase transparency further, and young, digitally savvy consumers will know quickly if brands are b.s.ing them or if they’re authentic and purposeful.
What would I recommend brands do as they head into the 2020s? Audit your brand. Be critical and ask the right questions. Don’t settle for anything less than a sharp brand definition and ensure that your brand’s purpose is clear. Then, train your team on what luxury means in the 2020s. Even with the best brands, there is often a gap in knowledge when managing luxury in a purposeful way for millennials and Gen Zers. Critically question the customer journey: Do you bring your brand purpose across each customer interaction? Does your staff know which role they have in creating a purposeful brand experience?
In luxury, you can’t afford any gaps. One red flag in the customer journey experience can sufficiently destroy a lifelong customer relationship, and in 2030, the stakes will be much higher. It will be a new game, with higher expectations, more alternatives, and better competitors. There will be no room for mistakes or weaknesses.
But it all starts with the brand. To get added luxury value, a brand needs a real purpose to express. Define one now because soon, it will be too late.
Daniel Langer is CEO of the luxury, lifestyle and consumer brand strategy firm Équité, and the professor of luxury strategy and extreme value creation at Pepperdine University in Malibu, California. He consults some of the leading luxury brands in the world, is the author of several luxury management books, a global keynote speaker, and holds luxury masterclasses in Europe, the USA, and Asia. Follow @drlanger
