Taking a Luxury Brand Downmarket

Our conversation on Château Lafite Rothschild got me thinking about how other luxury brands have managed the tradeoff between brand protection and expansion.

This Fast Company article has some interesting perspectives from senior execs at major fashion brands, such as Ralph Lauren and Coach. In particular, Eric Korman, former VP of Digital at Ralph Lauren, believes that luxury brands expanding downmarket into outlet stores has significantly hurt their premium brands:

“There was an over-expansion and distribution into places like factory stores, which presented a tremendous economic opportunity, but it came at the expense of the brand. If you start training the consumer to believe that the brand is widely distributed in factory outlets, people who were once your core customer will start doing that, or lose interest in the brand altogether.”

Nevertheless, the economic opportunity posed by reaching the large base of less-affluent customers is huge and provides a way for luxury brands to diversify their portfolios. I think the right approach is to create an adjacent brand that is distinctly separate from the luxury brand but allows well-educated customers to make an association between the two. The Auto industry uses this 'sister brands' approach very well. For example, Volkswagen Group owns a few major brands that operate in very different spaces in the auto market (Volkswagen, Audi, and Porsche):

• Volkswagen is regarded as a well-made, affordable car company.  Customers know that the cars share many components/design features with Audi and Porsche, so they feel good about the quality without paying the higher price.
• Porsche and Audi are regarded as premium car brands. Porsche customers don't worry that the company also produces Volkswagen cars, because they are clearly different products positioned at a separate segment of the market. Their brand identities are significantly different as well.

The key question is how a luxury goods company can develop a more downmarket brand without relying too heavily on its luxury brand. One strategy is to rely on M&A to acquire a brand that already has a distinct identity in the market.