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The World of Luxury: Creating and Selling Desirability
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The world of luxury operates on principles that might seem counterintuitive at first glance, especially when viewed through the lens of traditional economics. In this exclusive space, the demand for brands like Hermès and Ferrari, or LVMH-owned Louis Vuitton and Loro Piana, often increases with their prices. Creating a scenario where – contrary to what Economics 101 might suggest – higher prices can actually lead to increased demand.
Imagine walking down a city street, spotting someone clutching a Birkin bag or flashing a Rolex. That little twinge of desire to have one for yourself? This is a part of the magic luxury brands weave to keep us all hooked. It’s not just about owning a piece of high-end fashion; it’s about the status, the exclusivity, and the idea that not just anybody can have one. As Coco Chanel defined it: “Luxury is a necessity that begins where necessity ends.”
This desirability is meticulously crafted by the brands themselves, through strategies that might seem a bit odd at first glance. Take price hikes, for example. When Louis Vuitton or Ferrari jack up the prices of their bags and cars, you’d think people would just make do with other options. But the opposite happens. Suddenly, everyone wants one even more. It’s like telling a kid they can't have a cookie from the jar; it just makes the cookie all the more desirable. This is because luxury goods become more enticing when they're less accessible. That’s just how we humans function: what we want – but know we can’t easily have – we often end up wanting even more.
Grasping how the different companies are continuously honing the desirability of their brands can be hard, and they’re seldom generous enough to give us the true behind-the-curtain look that we’d like. Luckily, however, it’s an aspect often discussed with analysts and other market participants in earnings calls. And consequently, we made a list in Quartr Pro of what we believe are some of the most prominent publicly-traded luxury brands in the world, and searched for “desirability,” giving us all mentions of the keyword in reports, slide presentations and, perhaps most importantly, earnings call transcripts.
So, let’s try to understand more deeply how the companies are working with, and communicating about, the creation and selling of desirability by going through the earnings call mentions.
8 Earnings Call Quotes on Desirability
It’s evident that desirability is a fundamental part of successful luxury brands, but on the contrary, there’s also a need to be accessible. You can have the most desirable and exclusive brand out there, but if people can’t buy your products, what’s your business?
It’s like doing comprehensive research on an investment, taking time and effort to value it, and coming to the conclusion that there’s a potential 150% upside with minimal risk. But you end up not doing the investment anyway.
LVMH Q2 2018: Jean-Jacques Guiony, CFO
Here are two quotes from LVMH’s Q2 2018 call where the CFO, Jean-Jacques Guiony, is touching on the balance that’s needed between desirability and accessibility.
"As far as I'm concerned, the strategy of Vuitton and all the luxury brands within the LVMH Group is actually striking a balance between desirability and accessibility. So I don't understand the debate, inclusive, exclusive. But the debate, for me, is very much about making the brands accessible and at the same time, desirable. If we are very desirable and not accessible, we don't do any business. And if we are too accessible, it has some impact on the desirability, and we end up not doing any business anymore."
"So it's really at all times striking a balance on that. And what we try to do is really managing this balance, increasing the network, but not too much; making sure that we keep what makes the brands exclusive, in the case of Vuitton, no rebates; all the products are being sold within our own network, including perfume, which is a little bit counterintuitive when you look at the way perfumes are being distributed by the competition, et cetera. And you know the strategy of Vuitton, I will not get into some details. But I think the point to bear in mind is really this question of accessibility versus desirability. And for us the key point is really desirability. That's the key success to long-term growth of luxury brands, and particularly for Vuitton."
Richemont H2 2014: Bernard Fornas, Co-CEO
Another thing about desirability is that it plays a crucial role in the pricing power – and to a greater extent the profitability – of a brand. When a product is highly desirable, it means that consumers perceive it as being offered something unique or valuable that they can’t get elsewhere. Former Richemont Co-CEO Bernard Fornas stated the following in their H2 2014 call.
“What is interesting is that we are in a country where the desirability of the brand is the most important thing because you know there's [French] as we would say in French. I mean, if you get the strong desirability, you will get the pricing power. If you get the pricing power, you will get the margin. If you get the margin, you get the profit. And in Japan, especially, because, as Richard said, the prices -- I mean, we have increased the prices because of the pricing power of our brands. Obviously, for some of these Japanese guys, I mean, the products become expensive. But if at the same time, they are very desirable, they will buy, and this is what they did, and that they will continue to do. So in all these countries, and I was quoting the Herron study before, desirability is the name of the game, brand equity is the name of the game. And we check with all our brands that we are sure that everything they do in terms of products, in terms of communication, in terms of PR events, in terms of promotion, in terms of everything, that it will contribute to the brand equity.”
LVMH AGM 2018: Bernard Arnault, CEO
Upholding the desirable perception can be challenging, however. And while it’s not hard to understand the nudge of just producing and selling more of your very desirable product, it dilutes the desirability in the long run if it’s done too quickly. Consequently, as Bernard Arnault touched on during LVMH’s AGM in 2018, the ultimate goal must be the desirability of the brand, not revenue.
“At Vuitton, we could move a lot faster. Michael often says to me and so does Delphine that it would be quite feasible, but it would be the detriment of quality, and it would be opening up retailing, which would lead to serious consequences regarding the brand's perception, its status, its image and desirability. Vuitton remains a company whose fundamental goal, even the figures are very good, is not revenue, the fundamental goal is the desirability of for the brand. And what I am interested in at Vuitton is not its size, is that Louis Vuitton in 10 years' time, should be the most desirable brand in the world, even if there are some smaller brands that are growing very fast, et cetera. What I wish is that Vuitton should remain the most desirable, from that we won't depart from our strategy.”
LVMH Q3 2021: Jean-Jacques Guiony, CFO
The pricing power also says something about the luxury customer. It of course varies in the different tiers of the luxury pyramid, but at the peak of it, where companies like LVMH (many of its brands at least), Hermès, and Ferrari operate, price increases seldom affect volumes negatively. As we discussed earlier it oftentimes is the exact opposite – with higher prices often leading to increased demand. Something Guiony touches on below in the Q3 2021 call.
“I mean, we don't target a specific audience. I mean, we want to improve the desirability of the brand through products and marketing strategies that make sense with no particular designation to a specific group of customers. With regards to price elasticity, it's a difficult question. But traditionally, there is no such thing as price elasticity. I mean, basically, when we increase prices in a given geography, we don't see a big impact on volumes. It doesn't mean that we can increase price in a limitless way. But when we do price increases, we don't see a particular response from the client base in terms of volumes. And this has been true for as long as I have been following the industry.”
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Hermès Q2 2023: Axel Dumas, CEO
On an interesting note, Hermès’ CEO Axel Dumas argued in the Q2 2023 call that their prices actually aren’t related to desirability. They’re instead adopting a pricing strategy where the cost of labor and materials determines the price. Quite remarkable when you think about it, as the company’s legendary Kelly and Birkin bags retail at anywhere between $10,000 to almost $2 million.
“We have this strategy for a very long time, sometimes you agree with it, sometimes less, is that our price are done by the cost of production and not by the desirability of the product. And I think it's something which is very important for Hermès and it's a kind of trust that we have between our client of ours. What costs an Hermès bag, for example, is the cost of labor and materials that we put into it. It's not if you like it or not. And there is this client, for us it's about authenticity. And so I'm not looking at the price positioning of the other one. I'm trying to look with my cousin, Guillaume, which is heading production about our prices of goods, cost of goods. But our view is that that's the main driver for our price. And I think that the beauty also of the Hermès model is the fact that we -- it's first and foremost, the craftsmanship and the product and the creativity who leads the company.”
LVMH Q3 2022: Jean-Jacques Guiony, CFO
Revisiting Guiony at LVMH’s Q3 2022 call, however, gives us a look at the other side of the coin. Saying that “desirable brands can increase prices and non-desirable brands cannot,” he’s seemingly confident that desirability is an important piece of the puzzle. Relating this to Hermès again, we’d argue – while they’re probably not lying about their prices being more determined by costs – that charging those prices without the desirability of the brand would be impossible. Think about it, if you were to make a bag using the most expensive leather, and attach even more expensive diamonds to it, would you be able to sell it at gross margins exceeding 70%?
“I mean, it seems like pricing power is a sort of windfall -- comes from the sky. And some brands have it and some brands have not. The reality is that pricing power is actually a function of the desirability of the brand. Desirable brands can increase prices and non-desirable brands cannot. It's as simple as that. So what it is about is really developing strategies, marketing, products, distribution strategies that will increase desirability of the brand, so that in tough times or in other times, we can reflect into prices the cost of doing business. It's as simple as that. So when you look at Vuitton and Dior, I think that's what they've done, by and large. And therefore, they enjoy a significant pricing power. But it doesn't come -- it did not happen overnight. I mean, it's something that has been created patiently over years and years and years so that the desirability of the brand is such that clients accept it.”
LVMH Q2 2023: Jean-Jacques Guiony, CFO
Jean-Jacques took it even further in the Q2 2023 call, saying that “all our energy is focused on increasing the desirability of the brands.”
“I mean, the 3 top priorities are desirability, desirability and desirability. And this doesn't change. I mean, it was the case with Michael, now with Pietro and with Pietro now with Delphine. I mean, there is no change at all in our strategy, and all our energy is focused on increasing desirability of the brands.”
LVMH Q4 2023: Bernard Arnault, CEO
It makes one think, how can luxury brands continue growing without diluting the desirability of the brands? Even Bernard admits the temptation to just go on producing and selling more in their Q4 2023 call. But that’s something that has to be resisted at all costs, not only for the desirability (their main asset according to him) but also for upholding flawless product quality. LVMH has increased its revenue for the past ten years with a CAGR of almost 11%. And Bernard Arnault seems quite satisfied with growth rates around that number, although he might like it even lower.
“Fendi is continuing growing from strength to strength. And Loro Piana, greatly sought after of luxury as it's known is posting very high growth rates. To my mind, overly high. We need to put the brakes on a bit because I'm often told that growth rates, why are you only delivering 8% to 9%? Well, I find that's pretty good. And I hope that we won't exceed that. I'd rather slow than push. And in this group, I'm fortunate in having people that I need to slow down. I mean I spend my time slowing. I did it for Delphine. Michael spent 10 years trying to put the brakes on it. But it's easy to develop this business. We have so many successful products. All we have to produce more, but we have to resist that to no point. They must be of flawless quality, and you mustn't be in a hurry when you're achieving 8% or 9%, maximum 10%. That suits me fine. I don't know for the analysts, it's enough -- well it's never enough. They're never happy. So that's really not a problem. But at least for the brand, for the desirability of the brand, our main asset really, midterm, it's perfectly adequate.”
In Conclusion
In the world of luxury and high-end brands, creating and nurturing desirability is crucial. These brands master the delicate balance of elevating demand through heightened prices, intertwining exclusivity with allure. This dance of desirability is not just about the desire to own a premium product but also about the prestige and unique status it confers, making luxury items symbols of a distinct, enviable lifestyle. Understanding this dynamic offers profound insights into the luxury market’s unique economics, where the rarity and heritage of the products serve as their ultimate selling points.
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