ECONOMIC ANALYSIS

Dr. Azlina Hanif, Sept 2011-Jan2012

CASE STUDY ANALYSIS ECO740: ECONOMIC ANALYSIS Luxury goods: no sign of slowing
If youve got it, flaunt it tastefully, of course. From the Medicis to Marie-Antoinette, that age-old human trait has sustained small armies of quality manufacturers. In the 21st century, it may be Asias Wangs and Satos. The important question is whether or when todays chilly economic climate may infect this cushioned elite and cause them, too, to rein in spending. Judging by recent numbers from a couple of top-end manufacturers, it will not be this year. Richemont, the Swiss maker of Cartier jewellery and Baume & Mercier watches, shrugged off the problems posed by a strong Swiss franc and produced a 29 per cent sales increase (or 36 per cent at constant exchange rates) in the six months to September. Italian leather specialist Tods strode to 15 per cent in the first nine months of 2011. Of course, both companies can thank the swelling ranks of wealthy Chinese: mainland China led the sales charge. But US revenue growth was also in the strong double-digits, and in Richemonts case even disaster-struck Japan, the luxury industrys number two market, clocked up 9 per cent. Next year may be tougher Richemonts chairman Johann Rupert is vague, but cautious and comparisons will be more difficult. But shifting distribution patterns and the recent growth in directly owned retail outlets, which now account for almost a third of luxury sales worldwide, give high-end manufacturers more control over their destiny, Bain & Co notes. For investors, the companies shares are no cheaper than their products. Richemonts have tripled from their 2009 lows, and now trade at 17 times 2011 forecast earnings. That is cheap relative to Burberry or Prada, which look decidedly stretched on multiples of more than 20 times. Richemont also has net cash of 2.6bn. Investors can be relieved that the company, unlike its customers, is in no hurry to spend it. Adapted from Financial Times, November 13, 2011 7:46 pm

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Discussion questions:

a) Based on the article, explain the reasons why there are no signs for the sales of luxury
goods to slow down (4 marks). Based on the article, the reasons for no signs for the sales of luxury goods to slow down are the swelling ranks of wealthy Chinese. It is because the mainland China led the sales charge. Other than that, US revenues also growth in the strong double digits and in case Richemont, even disaster struck Japan, the luxury industry growth clocked up 9 per cent. Besides, Richemont also known as the Swiss maker of Cartier jewelry, brands whose name are associated with luxury and high quality. The shifting of distribution patterns also can be a reason why luxury goods will not slow down.

b) Using a diagrammatical analysis, show the effect of the situation described in the article,

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on the equilibrium price and quantity in the market for luxury goods (8 marks). Price

S P1 D1 PO DO Q0 Q1 Quantity

Based on the diagrammatical analysis, we can see the demand of luxury product is still increase even the price is higher. This situation conversed with the law of demand. Exceptional demand is where as the price of a product increases, the demand for it will increase. This theory may also apply to goods that the consumers judges to be a good quality because a consumers perception may be such that he views at a high price as superior products and of high quality and prestige of the products. For example, people still buy luxury goods such as Rolex watch even the price is high.

c) The article illustrates a situation that contradicts the standard demand theory. Explain what situation this is (6 marks).

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The law of demand states that the higher the price of a product, the lower the quantity demanded of that product and the lower the price of a product, the higher is the quantity demanded (ceteris paribus). But, the article illustrates the contradicts of the standard demand theory. This situation occurs because of few factors.

1. One of the factors is consumers income. When income increases, consumers

demand for more goods and services will increase. Increased wealth accumulation across the globe over the last decade has enabled more consumers than previously to buy luxury goods and led to increased numbers and types of luxury firms and products. The lifestyles of consumers also changed and demand for more luxury products.

2. Other than that, taste and fashions of consumers chance significantly. If a product
becomes more fashionable, the demand for it will increase and if the same product becomes outdated, the demand for it may fall. Nowadays, distributors will keep their product design with the latest styles to grab consumers attention.

3. Demand depends on the size of the total population or the number of buyers in the
market. A larger population with a high rate of growth creates a greater demand for goods and services. Countries with high population like China and India have a high demand of goods and services. The income for the consumers also increase and it make people more sophisticated and demanding for luxury goods.

4. Advertisements also can increase the demand of luxury goods. Advertised goods
normally have a higher demand because of awareness. Consumers will buy products that they are aware of the existence of those products. The luxury goods manufacturer choose celebrities and beautiful models to be their endorser and it will attracts consumers to buy their goods.

5. Level of taxation can lead to an increase of demand. The higher taxes, the lower
the purchasing power of consumers. This will lead to the decrease in demand and vice versa. If the government reduced income tax by 10%, consumers will have more money to spend on goods and services. This will increase the demand for goods and services. For example, to promote Malaysia as a shopping heaven in asia by providing branded goods at competitive prices, the government proposed that import duty on approximately 300 goods preferred by tourists and locals, at 5% to 30% be abolished. Such goods are apparel, handbags and others luxury goods d) Discuss, with examples, the competitive strategies that can be undertaken by Richemont to sustain its profitability in the luxury goods market (12 marks).

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1. Richemont can take few competitive strategies to sustain its profitability in the luxury
goods market. One of it, Richemont must keep on giving promotion to the consumers. This strategies can creates awareness among consumers. For example, Habib Jewels keep on giving promotion on selected jewellery every festive season. This is because consumers needs and wants will increase from time to time.

2. Other than that, to increase profits from existing brands, Richemont can improve its
production efficiency, increase the demand through more users, more uses, and more usage. A firm also can defend its existing base through line extensions and expand on a current brand, flanker brands or new brands in an existing product area and brand extensions.

3. Whenever a brand gains popularity and acceptance from its target customers in its
core business, the next obvious step for the brand is to charter a new course by venturing into different product lines, different segments, and ever different markets. For example, Giorgio Armani with its iconic popularity amongst the elite of the society and the fashion literate segment of the market has followed similar steps by extending the brand. Today the Armani brand architecture encompasses one corporate brand and five sub-brands, each catering to different sets of target customers and at different price levels. The Armani product lines are Armani Collezioni, Emporio Armani, Armani Jeans and A/X Armani Exchange.

4. Nowadays, gold and diamond can become one of the investments to the
consumers. Richemont can take this chance to create their competitive strategies. Richemont can adopt DeBeers diamond company most creative strategy. Its recent ads attempt to convince consumers that expensive diamonds are not luxuries but thoughtful investments. Better, in fact, than putting the consumers money in the stock market. DeBeers creates a slogan A Diamonds Is Forever that can create awareness about investment.

5. Other than that, differentiation strategy can provide high perceived value by
justifying a substantial price premium usually to a selected market or segment. It is usually adopted to counter or to compete others in seemingly similar segment. A convincing example is the luxury brands of BMW and Mercedes Benz new series. This luxury products manufacturer must carefully select their market segment. He selected target market are more concerned to the prestige of the brands name including the high quality of the products.