Cebreros Violeta Industry Analysis - Leather Goods

LUXURY LEATHER GOODS
INDUSTRY COMPETITIVE ANALYSIS

JANUARY 13TH 2012
BY: Violeta Cebreros
ACKNOWLEDGEMENTS
I would like to thank professor Dr. Ingo Bbel for shareing his knowledge and for his
invaluable support and guidance. Deepest gratitude are also due to all other professors at the IUM
since all aspects come into play when doing a comprehensive industry analysis.
EXECUTIVE SUMMARY
The objective of the present industry analysis is to provide an overview of the main trends
and characteristics of the luxury leather goods industry to further understand the underlying
drivers of supply, demand and ultimately profitability in the sector. All the data collected for the
industry analysis was obtained through extensive research on Internet and, thus all sources are
primary source such as reports from Euromonitor, Datamonitor, Bain & Company,
MillwardBrown, BCG, etc.
Luxury leather goods comprise a subcategory of luxury accessories and typically refer to
products such as handbags, wallets and belts made out of high quality leather. The category of
luxury leather goods is estimated at a value of 28 billion for 2011, while the global personal
luxury goods markets is estimated at a value of 191 billion for 2011.
Todays post-recession economic environment is favorable for the luxury market, with demand
soaring due to an economic boom in emerging markets, especially China. However, high taxes in
the Asia-Pacific markets have lead to price differentiation and lower margins for the companies.
Another industry trend that has led to lower margins is the cost increases due to steep price
increases of high-quality leather hides provoked by scarcity, leading many of the companies to
seek vertical integration with suppliers to ensure their supply. Moreover, demand has also
experienced an increase due to a shift in the demand due to a change in consumer preferences.
Increasing consumer consciousness has swifted preferences away from ostentatious consumption
and towards the high-end classic products which are considered durable.
In terms of competitiveness, the luxury leather goods sector is competitive due to the large
number of brands in the market, which find the industry attractive due to the high profit margins.
However, differences amongst products and sellers exist- conglomerates and single-brand
companies, core business in fashion or core business in leather goods, artisanal production or
fabric production and, finally, brand. In the luxury leather goods sectors brand image is a key
differentiating factor amongst firms, specially since it commands a premium and builds on
customer loyalty. Key players in the industry include Louis Vuitton, Gucci, Prada, Chanel,
Herms and the likes. Although most key players are of European origin they all compete at a
global scale. Most luxury brands have built a considerable network of directly-operated boutiques
which give them more control over their distribution, hoever, they still rely on department stores
to broaden their scope and specially to reach emerging markets where brands are still to set their
own operations.
Overall, the luxury leather goods industry is thriving and is expected to continue growing
in years to come. For brands to maintain their positioning and market share they embrace the new
consumer trends and adapt their business strategiy to remain profitable. They must move away
from affordable luxury and focus on absolute luxury products, this will allow them to find a
better balance between demand and supply, reducing some of the strain on supply provoked by the
scarcity of high-quality leather. With this change the gap between supply and demand is reduced
in terms of volume but not value as constumers are now purchasing a higher price-point, which
will also lead to higher margins for the companies.
TABLE OF CONTENTS
I.
INTRODUCTION
1
II.THE
LUXURY
LEATHER
GOODS
INDUSTRY
2
KEY FIGURES
III.MACROECONOMIC ENVIRONMENT SHAPING THE BUSINESS LANDSCAPE FOR THE LUXURY LEATHER
GOODS INDUSTRY
PESTEL ANALYSIS
IV.COMPETITIVE
ANALYSIS
9
MARKET STRUCTURE
KEY INDUSTRY PLAYERS
THE FIVE FORCES MODEL
INDUSTRY DYNAMICS & INTERACTION AMONGST PLAYERS
V.DEMAND
AND
SUPPLY
OF
LUXURY
10
10
16
21
LEATHER
GOODS
22
SUPPLY OF LUXURY LEATHER GOODS

DEMAND OF LUXURY LEATHER GOODS
23
24
VI.CONSUMERS AND CONSUMER TRENDS-WHO ARE THEY? WHAT DO THEY WANT? WHY DO THEY
BUY?
VII.
25
CONCLUSION
28
VIII.
REFERENCES
30
IX.
APPENDIX
1

INDUSTRY COMPETITIVE ANALYSIS
I.
INTRODUCTION
The main objective of the following report is to provide a snapshot of the luxury leather
goods sector today. What does it include? Who are the major players? Why and what are
consumers buying? All of the information collected for the industry analysis is product of
extensive research on Internet, it all consists of primary sources such as reports on the luxury
industry, leather goods and luggage industry, brand power, etc.
In the first section The luxury leather goods industry the scope of the industry is defined
and key figures of the industry are provided. In the second section Macroeconomic environment
shaping the business landscape for the luxury leather goods industry there is an overview of the
overall environment in the industry along the six areas considered in the PESTEL analysisis. In
section three Competitive analysis the market structure, key players and industry dynamics are
observed. In section four Demand and supply of luxury leather goods aspects of the demand and
supply are touched on. Finally on section five Consumers and consumer trends-who are they?
what do they want? why do they buy? a description of the luxury consumers and there
motivations, as well as changes in consumer preferences are explained.
II.
THE LUXURY LEATHER GOODS INDUSTRY

First and foremost, to realize this industry analysis it is important to define what the luxury
leather goods industry encompasses. Now a days, you can find luxury products across a number of
industries, making it very difficult to accurately estimate the value of the total luxury market and
any of its specific sectors. Furthermore, the concept of luxury is subjective. For some luxury relys
on superior quality, for some premium-price and for others brand image, thus leading to
discrepancys among different sources. However, in general, reports consider a combination of
these elements to determine the value of the different categories; according to Euromonitor1 the
categories which comprise the luxury market are: Designer Clothing and Footwear, Luxury
Accessories, Luxury Jewellery and Timepieces, Luxury Travel Goods, Luxury Tobacco, Fine
Wines/ Champagne and Spirits, Super-premium Beauty and Personal Care, Luxury Fine China
and Crystal Ware, Luxury Writing Instruments and Stationery and Luxury Electronic Gadgets.
Once relegated to second-class fashion status, accessories now share the spotlight with
apparel designs.2 Leather goods make a significant part of the accessories industry alongside
footwear, hosiery, gloves, hats, scarves, ties, shawls, scarves, handkerchiefs, wallets, suspenders,
eyewear and hair ornaments. However, leather goods comprise most of the category, with products
such as handbags, luggage, wallets and belts typically made out of leather.
1
2
Euromonitor International (2011), How Global is the Global Luxury Goods Market. May 2011
Diamond, J. and Diamond, E., The World Of Fashion, , Fairchild Books, Inc. New York, 4th Edition, 2008
2
KEY FIGURES
The value of the global personal luxury goods market was reported at 191 billion for 2011 by
Bain & Co. up 10% from the previous year3. In the same report luxury leather goods are estimated
at 28 billion for 2011 (Exhibit 1 & 2). Luxury leather goods is a rapidly growing category, with a
16% growth from 2010 to 2011.
The leather goods category is at times also grouped with luggage, with bags, wallets and
purses accounting for 57.1% of the global luggage and leather goods market in 2009 according to
Datamonitor4. Further information of sales shares by geographic area are presented in the table 1.
Data for the luggage and leather goods market from 2009 and more current numbers for the global
personal luxury goods market in 2011 are presente. Although placed in the same table, the idea is
not to compare them as the information is not precisely comparable, but to form an idea of how
luxury leather goods sales take place globally.
Table 1- Sale Shares By Geographic Area

Global Luggage And Leather Global Personal Luxury
Goods Market Segmentation Goods Market Segmentation
% Share By Value In 2009
% By Value In 2011
Americas
52.3%
30.0%
Europe
24.0%
36.0%
Asia-Pacific
23.8%
29.0%
Rest of the World
5.0%
Source: Self-elaborated
As can be observed from the table, Europe and Americas are the most important markets for
luxury, however, Europe and the U.S. are mature markets which limits the possibilities of growth
in the markets. On the other hand, we can observe Asia-Pacific has experienced a boom in luxury
consumption.
3
Claudia DArpizio, Altagamma 2011 Worldwide Markets Monitor. Bain & Company and Fondazione Altagamma.
October 2011
4
Datamonitor, Industry Profile: Global Luggage and Leather Goods. June 2010
3
III.
MACROECONOMIC ENVIRONMENT SHAPING THE BUSINESS LANDSCAPE

FOR THE LUXURY LEATHER GOODS INDUSTRY
Overall luxury is a thriving industry, now recovering from the economic crisis of the past
years. Starting in 2008, the global macroeconomic downturn lead to low consumer confidence and
change in consuption patterns, affecting the luxury goods market. The year 2009 proved to be a
specially difficult year when the luxury industry value plummeted to 153 billion, down from
170 billion in 2007. However, 2010 was a rebound year with a growth of 13% driven by
emerging markets, especially China, and 2011 brought an additional 10% growth bringing the
industry up to 191 billion, an all time high for the personal luxury goods market.
PESTEL ANALYSIS
In the following PESTEL analysis we go into details of the macroeconomic environment
shapping the luxury leather goods market. Although PESTEL analysis usually are focused in a
specific country and industry, the following analysis attempts to highlight the most relevant global
factors since most of the information concerning the luxury market is in global terms, however,
there is a slight focus on the U.S. market as it remains the number one market for luxury valued at
48.1 in 2010 according to Bain & Co.
POLITICAL FACTORS
Global economic development is tied to politics more than ever, since in the face of an
economic crisis governments throught the world had to take actions to safeguard their
economies. Politicians have had to rethink the involvement of their countries in the
economic reform. Since 2009 it was decided that the G20 group, composed of the major
economies in the world, including countries with emerging markets, would serve as the
4
board of directors on decisions concerning the global economy. It was the U.S.s
Preseident Obama, who initiated the move to transfer responsabilities from the G8,
composed of the eight most developed countrie5, to the G20.
Politics also play a fundamental role in foreign trade, making it extremely relevant for
the luxury market whose companies are for the most part based in Europe, but depend
mainly of foreign sales. Although the U.S. and the EU are very integrated and together
account for approximately half of the global GDP and for nearly a third of world trade
flows, in recent years President Obama has rethought foreign-policy and focused on the
the Asia-Pacific region. An other element to consider when thinking about foreign-policy
is the challenge imposed by the emergence of electronic commerce which is not fully
regularized yet.
In the specific case of U.S. its political and economic importance in the global sphere have
placed it high on the list of nations susceptible to terrorist attacks. This is especially
relevant to the luxury industry since most sales depend on tourism. Chinese tourists
visiting New York and Hawaii are an especially important segment since there
consumption is growing.
ECONOMIC FACTORS
The global luxury leather goods market had a reported value of 28 billion in 2011,
performing above the average.
A economic boom in emerging markets such as the BRIC 6 countries, Mxico and the
Asia-Pacific region are driving the demand for luxury goods.
5
6
G8- the U.S., Japan, Germany, France, Britain, Canada, Italy and Russia
BRCI countries- Brazil, Russia, China and India
5
The year 2010 marked the rebound for the global personal luxury goods market, showing
the first signs of growth after the economic crisis. The year 2011 also had a double digit
growth. However, for the following years 2011-2014 the CAGR is forcasted to be of 6-7%
reaching 225- 230 billion in 2014. The recovery in sales is reflected in an increase in
brand power.
Recent steep increases in leather prices have affected companies margins. Leading to
companies rethinking their reliance in the leather goods sector.
The high taxes in the Asia-Pacific markets such as Japan and India have lead to price
differentiation and lower margins, with the companies absorbing some of the costs of
exporting the products into foreign countries rather than completely passing them on to
the customers.
SOCIAL FACTORS
Fashion and leather goods have more than practical functions, they also act as a signifier
of socio-economic class and a way of displaying individual identity and group identities,
which make clothing and accessories essential to consumers.
Brand loyalty exists, especially towards the top end of the industry since it is easier for
customers to form emotional attachements to luxury brands and luxury goods, since their
durability and elevated prices make customers think more about the purchse.
Fashion and leather good retailers can differentiate themselves quite strongly through the
styles and designs of their goods. Even un-known designers can become successful from
one collection to another due to the unpredictable nature of fashion. Products are
determined by designers, sub-cultures and are subject to sharp and unpredictable changes.
Increasing consumer consciousness and switch in consumer preferences, especially in

mature markets, has shifted the demand away from ostentatious consumption- affordable
luxury- and towards the high-end classics absolute luxury.
Self-indulgance has lead the newly established middle class in the emerging markets to
sample luxury via entry-level luxury products, which work as a gateway to absolute
luxury products. Accessories, including leather goods, are perfect for this entry-level
phenomenon.
Consumer are realizing that status can be expressed by lifestyle and experiences, rather
than by luxury goods. This has given way to an increase in the importance of the luxury
experience, mainly in-store, through additional services such as personal shoppers, etc.
experiences that offer the mid-market the chance to be treated as someone very special.
Younger consumer base, due to the fact that in emerging markets the younger population
has higher income.
Consumers are now looking for responsibly sourced luxury as they are becoming more
sensitive about sustainable development, fair-trade and environmentally friendly products.
It is important to notice that consumers are willing to pay a premium to back their values.
Companies such as Stella McCartney are pioneers in this new environment with products
marketed as 100% certified organic, natural and not tested on animals. Additionally, social
responsibility is an increasingly important dimension of wealth as there is a noticeable
link between wealth bands and philanthropy.
TECHNOLOGICAL FACTORS
In terms of production technology is not a key elements, since in luxury products the
elements of craftsmanship are a key.
7
Luxury brands, particularly within the fashion and leather goods categories, are finally
looking at online potential. Premium store environments are still key to luxury positioning
but, increasingly, websites are being used to engage customers and provide accessibility
as demand expands in emerging markets.
ENVIRONMENTAL FACTORS
Leather has a considerable environmental impact as it shares responsibility for the

environmental damages caused by the meat industry and the contamination caused by the
toxins used in tanning. Since companies cannot produce their products without harming
the environment, they can counteract the damage by engaging in other Corporate Social
Responsibility activities, like charity.
Protection of ecosystems to ensure the resources necessary for production is also a concer
for companies as they are already experiencing a scarcity of quality leather hides and
struggling to keep up production, specially in the case of some exotic leathers.
Carbon footprint due to green house gas emissions during every day operations of the
business: lighting, air conditioning in stores, transport of products, etc.
LEGESLATIVE FACTORS
The World Banks 2011 Doing Business report ranked the U.S. fifth with regards to ease
of doing business. The country's economic policies are generally pro-business and its
financial regulatory system is well developed, with the financial markets being open to
competition.
In October 2007 the U.S., the European Union, Switzerland and Japan announced that
they would negotiate a new intellectual property enforcement treaty the AntiCounterfeiting Trade Agreement or ACTA.
Most leather comes from developing countries such as India and China, where animal
welfare laws are either non-existent or not enforced.
The legal environment and regulation in the Asia-Pacific region are very strict and limit
the way brands can enter the markets, as well as increasing the costs of operation through
regulations concerning taxation.
IV.
COMPETITIVE ANALYSIS
The luxury leather goods sector is competitive because of the large number of competitors
in the market. All though not all major players were originally focused on leather goods and
accessories, the great economic appeal of the luxury leather goods sector, which generally
commands the highest margins, has lead most high-end fashion brands to expanded their their
product lines to include fashion accessories. As can be seen from a report from Fondazione
Altagamma7 leather goods perform over the average and are the most represented firms in the top
ten performers according to EBIT margin, with companies sucha as Coach, Herms, Prada and
Tods making the ranking. The average ROI for leather goods companies was 17.7% in 2010,
making it the best performing category both in terms of sales growth and profitability.
Armando Branchini, A. and Varacca Capello, P. (2011), Fashion & Luxury Insight FY 2010 Results. Fondazione
Altagamma and SDA Bocconi, October 2011.
9
MARKET STRUCTURE
Competition in the leather goods market is far from perfect competition as products in the
category are greatly differentiated in many ways such as, type of product (handbags, wallets, belts,
etc.), brand, price and design. Differences among sellers also exist as firms differ in size, with an
obvious difference between the size of conglomerates and single-brand companies. Other
differences arise in terms of production costs derived from the origin and quality of inputs used
and the level of craftsmanship the products confer. Additionally, in the luxury leather goods
sectors brand image is a key differentiating factor amongst firms, since it is a crucial element in
their ability to command premium-prices from consumers.
KEY INDUSTRY PLAYERS

Since the late 1980s the fashion apparel and accessories industries have increasingly
become more and more concentrated due to the formation of luxury conglomerates. Todays
competitive environment is determined by strong competition at brand level with the top 5 brands
accounting for 21% of the total personal luxury goods market in 2010, leading to the increasing
concentration of the industry with conglomerates fighting to have a wide array of brands in the
hopes of cautivating a broader range of consumers. In 2010, the top 5 luxury groups accounted for
35% of the total personal luxury goods market according to the Bain & Co. report. The drive for
consolidation is further supported by the finding in the Fondazione Altagamma report which
clearly show the financial benefits of size. In 2010, companies with an average size of 5 billion
or more proved to be the most profitable in according to their EBIT margin and ROI as well as
having a better cash flow than their smaller competitors. Risk is also something to take into
10
account, since size gave bigger companies better financial estability, a very important factor to
ride out the crisis and thrive in the current favorable yet still volatile post-recession environment.
Thus, in understanding the industry it is important to begin with the identification of multibrand players and single-brand players, as well as categorizing brands according to their core
business, separating those whose core business is apparel from those mainly in the leather goods
business, and finally, it is important to classify brands depending on the level of luxury, which
mainly depends on the craftsmanship and exclusivity. This typology allows us to identify where
the added value of every particular brand lays. It is also important to understand the importance of
the brands heritage and story when it comes to luxury brands, as it is an intrinsic part of the brand
image.
As previously mentioned, we will see that there is various players at the brand level. Even
though several of them belong to the same luxury groups, since in the luxury industry the brand is
such an important element of differentiation and value for customers, generally brands are
managed independently to respect the brand identity. Thus, we must identify them as separate
players. It is important to mention, that al though Richemont is the second largest luxury group in
the personal luxury goods market, it is not a strong player in the luxury leather goods sector since
it only participates with Lancel, which has been struggling to position itself as a luxury brand.
11
Table 2- Key Industry Players At Brand Level

Company
LVMH Mot
Hennessy Louis
Vuitton SA
Brand
Core Business- Origial

Bussines
Louis Vuitton
Leather Goods- Luggage
Loewe
Marc Jacobs
Leather Goods- Leather

specialist
Fashion- R-T-W
Fendi
Leather Goods- Handbags
Gucci Group NV Gucci

Subsidary of PPR
Bottega Veneta
Country
Craftsmanship
And Year
& Exclusivity
Of Origin
**
France
1854
***
Spain
1846
**
U.S.
1986
***
Italy
1925
**
Italy
1921
***
Italy
1966
**
France
1961
***
Spain
1919
**
Italy
1913
**
Italy
1993
***
France
1837
*
Italy
1960
YSL

specialist
specialist
Fashion- R-T-W
Balenciaga
Fashion- Couture
Prada
Miu Miu

specialist
Fashion- R-T-W
Herms
International
Valentino
Fashion Group
S.p.A.
Chanel S.A.
Herms
Leather Goods- Saddles
Valentino
Fashion- Couture
Chanel
Fashion- Haute couture
**
Burberry Group
Plc
Christian Dior
Burberry
Fashion- Gabardine
Christian Dior
Fashion- Haute couture
**
Fashion- Shoes
***
PRADA S.p.A.
Salvatore
Salvatore
Ferragamo
Ferragamo
S.p.A.
Mulberry Group Mulberry
Plc
Lancel
Richemont
Luxury Group
Limited

specialist
specialist
*
*
France
1909
UK
1856
France
1946
Italy
1927
UK
1971
France
1876
12
According to the 2011 BrandZ Top 100 Most Valuable Global Brands8 report Louis
Vuitton placed at spot no.26 with a brand value of USD$24,312- up 23% from its brand value in
2010- making Louis Vuitton the most valuable luxury brand. It is later followed by Herms, which
placed at spot no.71 with a brand value of USD$11,917- up 41% from 2010. Allthough it is
important to realize that the brand value of the luxury sector is still 13% under its pre-recession
value in 2008, it is promising to see customers are once more turning to luxury brands. As can be
seeb in the case of Burberry who had a brand value appreciation of 86% from 2010 to 2011,
placing its brand value at USD$3,379.
According to this same report Louis Vuitton, Herms, Chanel and Gucci where amongst
the Top 15 brand contribution leaders- brand values reported for Chanel and Gucci are of
USD$6,823 and USD$7,449 respecyively. Brand contribution measure the emotional bond of
consumers to the brands, thus luxury brands typically rank high due to their heritage,
craftsmanship and exclusivity which customers highly appreciate (Exhibit 3).
The previous table provides an overview of the industrys key players at brand level,
however, further financial analysis is not always possible at such level since not all luxury groups
dissclose the financial information at brand level, and rather reports are presented for the entire
group. It is also important to note that many companies present results for fashion apparel and
accessories which include additional brands to those previously mentioned and not included due
to their lack of relevance in the luxury leather goods sector. Finally, when comparing data from
the companies it is to be taken into account tha the last available annual reports where considered
for each company, 2010 or 2011, so there is a discrepancy in years for some of the companies, and
in currency since british brands report their financial information in pounds.
MillwardBrown, BrandZ Top 100 Most Valuable Global Brands. 2011

13
Table 3- Key Industry Players At Group Level

Company
LVMH Mot
Hennessy
Louis
Vuitton SA
Gucci Group
NV
Subsidary of
PPR
PRADA
S.p.A.
Herms
International
Valentino
Fashion
Group S.p.A.
Chanel S.A.
Key Facts
Total revenues: 20,320m in 2010
Fashion & Leather Goods revenues: 7,581m in 2010
Distributer & Retailer
Directly-Operated Stores: 2545
CEO Bernard Arnault
83,542 employees
Activities: Manufacturing & Selling
Leather Goods revenues: 2,033m in 2010
CEO Robert Polet (CEO of PPR Franois-Henri Pinault)
11,941 employees
Leather Goods revenues: 1,014m in 2010
Directly-Operated Stores: 319 (Franchises: 33)
CEO Patrizio Bertelli (Chairwoman Miuccia Prada Bianchi)
7,199 employees
Leather Goods-Saddlery revenues: 1,205m in 2010
Retailer (Distribution of watches, perfumes and tableware)
Directly-Operated Stores: 317 (Concessionaires: 21)
CEO Patrick Thomas
8,366 employees
Valentino revenues: 300m in 2011
Directly-Operated Stores: 112 (Single-brand boutiques: 700)
CEO Stefano Sassi
626 employees
Total revenues: estimated at 3,000m in 2011
CEO Maureen Chiquet (Chairman Alain Wertheimer)
1,270 employees
Market
Share
38.43%
10.31%
5.14%
6.11%
1.52%
15.21%
14
Company
Burberry
Group Plc
Key Facts

Non-apparel: 563m in 2011
Directly-Operated Stores: 174 (Concessionaires: 199 & Outlets:44)
CEO Angela Ahrendts
6,681employees
Christian
Fashion & Leather Goods: 2,555m in 2010
Dior
CEO Sidney Toledano (Chairman Bernard Arnault)
86,818 employees
Salvatore
Leather Goods revenues: 244m in 2010
Ferragamo
S.p.A.
CEO Michele Norsa (Chairman Ferruccio Ferragamo)
2,745 employees
Total revenues: 122m in 2010
Mulberry
Group Plc
CEO Godfrey Davis
821 employees
Richemont
Other Businesses revenues: 967m in 2011
Luxury
Group
Directly-Operated Stores: 246 (Only Lancel)
Limited
CEO Johann Rupert
21,000 employees
Market
Share
3.44%
12.95%
1.24%
0.75%
4.90%
It is important to highlight that the majority of the key industry players are publicly traded
companies, since it is through this source of financing that most of the companies have been able
to finance their global expansions. Perhaps the only exceptions that remain are Chanel and
Valentino Fashion Group. Although the majority of the aforementioned companies are of
15
European origin- especially France and Italy, countries typically known for their luxury productsthey now all compete at a global scale both in mature and emerging markets. Therefore, the
market shares mentioned on the previous table are in global terms. However, it is important to
consider that the market shares calculated above are just an estimate since not all the revenues
were exactly comperable due to differences in years, currency and categories. To calculate the
market share currencies in pounds were converted to euros at the current exchange rate of
1.20489032 euros per pound and the subcategories of fashion and leather goods or the likes,
depending on the companies way of classifying, were considered whenever possible- in some
cases only a total revenu was available or a total revenue per brand.
THE FIVE FORCES MODEL

The Five Forces analysis, suggested by Porter, offers a a holistic view on the competitive
dynamics of the industry and helps us identify where profits are being allocated. The model is also
helpful in further understanding the impact of the macroeconomic environment on companies
strategy and interactions, by pointing out the underlying drivers in each of the forces.
BARGAINING POWER OF SUPPLIER

In the case of luxury products, and certainly luxury leather goods, the quality of raw
material is of the utmost importance as it has an impact in the feel of the finall product. Given this,
luxury brands have always recognized the importance of stablishing long-term relationships with
reliable suppliers offering the highest quality materials. These relationships are managed in such a
way that suppliers are generally locked-in to the relationships by having high switching costs.
Furthermore, many brands have looked for vertical integration by investing in supplier companies
16
or setting up their own farms for leather production, specially in the case of exotic leathers which
are scarce. Additionally, leather suppliers are generally not organized to reach final consumers in
terms of final product, branding and distribution, thus, they depend on luxury brands buying their
leather hides. Although scarcity has perhaps increased suppliers bargaining power, overall there is
a low supplier power in the luxury leather goods market.
BARGAINING POWER OF BUYERS

When considering the bargaining power of buyers, the brand loyalty individual consumers have
towards the specific brands is key to determine which party has the most influence. Since most upscale department stores and e-stores, such as Saks Fifth Avenue, Neiman Marcus, Barneys,
Harrods, Selfridges, Net-A-Porter, etc. are quite known on their own they are powerful channels
for up-and-coming designers to display their products supported by stores customers recognize as
luxurious and fashionable. However, in the case of established brands, such as the ones mentioned
in the key players section, loyalty tends to be towards the brand and not the store, allocating the
bargaining power with the brands. Furthermore, not carring certain luxury brands customers
expect weakens the stores image.
Additionally, luxury brands have become for the most part expert retailers themselves with
flagship stores and directly-operated boutiques worldwide meaning they do not rely soley on
wholesalers to distribute and sell their products. However, department stores in emerging markets
where brands are still to set their own operations may hold a higher bargaining power, but overall
buyers bargaining power is moderate.
Finally, when talking about directly-operated stores we must talk about individual
consumers as the buyers. In this case, bargaining power is also moderate as most clients have
17
emotional attachements to their preferred brands. Moreover, although customers do not incur in
switching costs from buying different brands, designs and brand positioning are differentiated
enough that customers may find it difficult to switch brands. Therefore, as a whole customers
always hold some bargaining power since they drive demand, but as no individual customer
represents a considerable wallet-share the bargaining power on individual customers is moderate.
THREAT OF SUBSTITUTE GOODS

Luxury leather goods consumption is driven by self-indulgence, meaning that potentially
any good or service may pose as a substitute as long as it covers this need for self-gratification and
pampering. Therefore, some of the most obvious substitutes are other products from the
accessories category, but substitutes may also come from categories such as jewelry and watches,
parfumes and apparel amongst other categories. Additionally, luxury leather goods, although
mainly purchased for their brand and aesthetics, also have a functionality element and therefore
may be substituted by products which meet this requirement. Specially after the crisis, some
potential customers remain price-sensitive and therefore may opt to substitute luxury leather goods
for their more affordable counterparts. However, it is important to mention that generally luxury
leather goods are considered durable goods, as opposed to their cheap counter parts which are
considered non-durable goods.
On the other hand, there are also customers who are unwilling to give-up luxury brands but
opt to consume or purchase them in an different way. Vintage and second-hand products, typically
sold by specialty stores or by individual owners through sites such as eBay pose a threat due to
their lower cost. Another threat is the rental of luxury handbags, which allows consumers to access
the dream and prestige of wearing a luxury handbag without having to purchase it.
18
Finally, counterfeit represents the biggest threat for all of the luxury sector, of which
leather goods is the most affected since handbags and wallets are amongst the most reproduced
products. Counterfeit is one of the most concerning challenges the industry poses for companies
and constant attempts at fighting it are carried on. Luxury groups, such as LVMH now have
special departments dedicated to fighting counterfeit or fight it to some extent through their legal
departments. Furthermore, organizations such as the Comit Colbert (France), Fondazione
Altagamma (Italy), Walpole (UK) and Circulo del Lujo Espaol (Spain), of which the luxury
brands are members, constantly work on fighting counterfeit through ad campaigns informing the
general public about it and the hefty fines due if cought with counterfeit products.
Efforts to counteract counterfeit have been paying-off as more and more countries actively
play a role in confiscating and destroying counterfeit products at the border, including China
whose government is making the first attempt to combat counterfeit. However, the damages
derived from counterfeit go beyond the mere economic impact since there is also an image
element. In luxury products scarcity and quality are indispensable to achieve the desired brand
image and counterfeit products, specially the higher-end copies, deteriorate brand image since
customers might confuse them with the real products. Overall, the threat of substitutes is high due
to counterfeit, since the previously mentioned substitutes only pose a moderate threat.
THREAT OF NEW ENTRANTS

In the luxury leather goods industry, new designer are constantly entering the scene since all
it takes is a popular design paired with a celebrity endorsement for customers to desire the
product. Moreover, it is possible for new designers to enter the industry on a small scale with a
relatively small capital investment. On the other hand, heritage and brand positioning serve as
19
entry barriers since achieveing a brand image comparable to that of established luxury brands
requires extensive investments on communication and media planning, as well as time for
customers to accept the brand and form emotional attachements to it. Additionally, the element of
heritage is impossible to replicate in the short-term.
Additionally, the industrys consolidation trend leads luxury groups to buy independent
brands which they consider to have potential and therefore pose a future threat. Consolidation has
also lead to the formation of additional entry barriers derived from scale and bargaining power,
sucha as economies of scale as some of the cost can be shared amongst firms and a privileged
position in terms of supply of raw materials and in distribution channels. Overall, although it is
easy for new entrants to enter the market, the threat of new entrants is considered low since it
takes a considerably long period of time for brands to position themselves as luxury brands and
truly compete at the level of the key players in the industry.
RIVALRY AMONG EXISTING COMPETITORS

The luxury leather goods market is highly consolidated at company level, however, at
brand level it is fragmented as there exists a wide array of brands ranging in size, design, heritage
and positioning. Brands are typically managed as independent companies to maintain their
creative control and brand DNA, therefore, brands tend to target specific customers. Furthermore,
brand loyalty tends to be strong despite the low switching costs for customers, which is why
luxury groups tend to focus on having an extensive brand portfolio covering different customer
segments. Overall, there is many brands in the luxury leather goods market yet the level of rivalry
is moderate since brands are, in a way, considered niche and therefore compete for different
customers.
20
INDUSTRY DYNAMICS & INTERACTION AMONGST PLAYERS

The personal luxury goods industry is characterised by its dynamism, with well-established
brands constantly finding competition from new players. New brands and recognized designers are
constantly popping into the scene due to one key element: creativity. Thus, there is little
concentration at brand level in the industry. An other trend that has made the industry extremely
dynamic since the 1980s when the consolidation process began, headed by Bernard Arnault, is
the revival of classic brands, which conglomerates often covet due to the potential value of the
brand names. The key to the revival of these brands has also been linked to creativity, finding the
right designer to exhalt the brands aesthetics in a contemporary way. Examples of such brands
include Christian Dior which revived thanks to John Galliano, Gucci during the Tom Ford period
and Chanel under Karl Lagerfeld. Finally, one last trend in the dynamics of the industry players is
the constant acquisition of brands by the conglomerates. In their desire to maintain there positions
as key players, conglomerates are constantly seeking to purchase or sell brands in order to build
portfolios which enhance their position and profitability. The perfect example of this is LVMH,
whose CEO Bernard Arnault earnd the nickname wolf in cashmere clothing due to his hostile
takeovers, of which perhaps only Gucci has been able to escape back in 2001. Currently, LVMH is
at it again, recently purchasing a stake in Herms. This action quickly raised speculations about an
eventual bid for the entire company, prompting Herms family members to look for court
protection by permitting their plans to create a holding company that will ensure the families
position in the company for the next 20 years.
Finally and foremost, the fashion and leather goods sector is dynamic in nature due to the
rapidly evolving consumer trends which require brands to keep up-to-date and offer new designs
each season. Especially, in the leather goods sector the It Bag phenomena ruled for at least the
21
past decade making competition extremely dynamic since each season the most desired bag would
be from a different brand or designer. Furthermore, luxury brands have realized that nowadays
creativity most expand beyond the runway collections in order to keep the brand image up-to-date
and continue to engage customers, therefore, driving for an even more dynamic and changing
environment. Not so long ago Internet was condoned by luxury brands, now it is one of the arenas
in which brands compete for customers attention. Some of the highlights of the industrys efforts
to utilize new technologies are Louis Vuittons London fashion show broadcast on YouTube and
Chanels entrance into e-commerce.
V.
DEMAND AND SUPPLY OF LUXURY LEATHER GOODS

Luxury brands have always been amongst the most coveted, however, scarcity and
exclusivity are intrinsic to luxury- so how can companies appropriately balance customers demand
and brands supply? On the demand side, companies are constantly investing millions of euros in
marketing and public relations to ensure their brands are desired and valued by the consumer, yet,
companies must be careful to attract the right consumers at the right price-point. Although, luxury
leather goods are amongst the most highly priced due to the margins they command, it is still
important to recognize that the democratization of luxury has increased the demand for luxury
leather goods as it is now possible for the aspitrational middle-class to purchase luxury brands.
Thus, on the supply side companies find themselves in the dilemma of reaping profits by fully
meeting the customers demand and offering more accessible luxury and aspirational luxury
goods or concentrating on absolute luxury goods and holding back supply in order to maintain an
image of exclusivity.
22
SUPPLY OF LUXURY LEATHER GOODS

The supply of luxury leather goods in 2011 was marked by further price increases lead by
further increases in costs due to the high costs of leather, as well, as by increases in strains to the
supply due to additional demand as consumers recover from the economic downturn of the past
years and preferences shift towards luxury products due to their durability. In terms of leather
good supplies a very important element to take into account is the scarcity of quality leather hides,
both of cattlehide and exotic leathers such as crocodile, snake and ostrich amongst others. This
scarcity of raw materials specially affects luxury brands since they are always looking for the best
quality. For example, Herms has resorted to running its own crocodile farms in an effort to better
meet the demand of their customers who are already forced to wait for years for certain exoticleather bags. An other example is Louis Vuitton who recently bought a 51% majority stake in
Heng Long, a crocodile leather supplier- the acquisition is valued at 92 million. Supply for the
likes of Herms and Louis Vuitton is also limited by labour, since craftmanship not only makes for
a slower production process but also requires highly skilled individuals and a long training
process.
An other aspect of luxury leather goods supply is that of the channels through which they are
distributed. Leather goods are distributed through department stores, specialty stores, flagship and
directly-operated stores and online. In general, retail oriented companies performed better as
retailing allows companies to take better control of their growth and image. It is also important to
take into account new consumer trends which place importance in the shopping experience rather
than just the product, thus making flagship and directly-operated stores increasingly attractive.
Luxury distribution has undergone a significant shift, with the retail channel growing faster
than the wholesale channel, with a 14% growth from 2010 to 2011 according to Bain & Co.
23
Moreover, the instability of department stores due to banckruptcies, extrem discounting policies
and unreliable stocking cycles in key markets- US and Japan- has impacted both the sales and
image of the brands damaging the business-to-business relationships between the brands and
wholesalers, leading many brands to tighten their distribution controls. Nowaday the retail channel
accounts for 28% of the personal luxury goods market worldwide. However, even though retail is
over-performing wholesale, the gap is narrowing, since wholesaling remains vital for brands to
reach costumers in international booming markets. The importance of the wholesale channel is
further supported by a report realized by Bain & Co. in cooperation with VOGUE9 which found
that women buying luxury goods have a preference for shopping in luxury department stores and
on online flash sales. Online is also a relevant channel accounting for 3% of total sales in the
personal luxury goods market. Although most luxury brands have finally embraced the online
channel, multi-brand sites remain as the preferred customer websites due mainly to the excellent
service level and discounts. It is also worth pointing out that the online channel is particularly
relevant to the accessories segment, including leather goods, due to the one size fits all nature of
the products.
DEMAND OF LUXURY LEATHER GOODS

The demand of luxury leather goods was marked by an increase in the demand, proving
that overall the luxury market is always amongst the most resilient in economic downturns. This
increase in demand can be attributed mainly to two sources: first the booming emerging markets
and changing consumer trends.
In relation to the booming emerging markets we must first and foremost talk about the BRIC
Bain & Company in cooperation with VOGUE, Why She Shops:The 2010 Fashion and Beauty Study. September
2010
24
countries, it is also important to mention that Mexico is many times considered along the BRIC
countries as an important emerging market, as are most of Asia-Pacific countries. However, when
talking about emerging markets, China is the most important country as it has emerged as an
example for all emerging markets in terms of penetration and localized value proposition. It is also
forcasted to remain as the fastest growing market for luxury, becoming the number one luxury
market in the next 5 years.
In the case of consumer trends, the extent of the impact of the recession on consumers values
is yet to be known, however there is already a notorious shift in preferences which have led to an
increase in the demand of luxury products, but also changed the buying patterns of consumers.
Further analysis about consumer trends is discussed in the following section as it is vital to
understand who are the consumers in order to have a further understanding of the demand of
luxury leather goods and services.
VI.
CONSUMERS AND CONSUMER TRENDS-WHO ARE THEY? WHAT DO THEY

WANT? WHY DO THEY BUY?
Luxury can be divided into absolute luxury, aspirational luxury and accessible luxury
and each of these categories attends to a different customer segment. Absolute luxury is aimed at
the High Net Worth Individuals mainly in mature markets, aspirational luxury and accessible
luxury are aimed at the middle class mainly in emerging markets where the purchasing power of
people is increasing, especially in the younger age group. The main difference amongst the
customer base for aspirational luxury and accessible luxury is in terms of willingness to pay
due to price-sensitivity and interest in fashion and accessories. The different classifications of
consumers are shown in the following image.
25
Image 1- Segments Of Consumers In Terms Of Style And Price-Point
Bain & Company in cooperation with VOGUE (2010), Why She Shops:The 2010 Fashion and
Beauty Study.
For luxury products the most interesting segments are fashion mavens and classic
professional, since they spend the most across all categories. There spending in accessories is of
19% and 20% accordingly. It is also important to note that their average age is of 33 for fashion
mavens and 44 for classic professional. These luxury shoppers are unique in terms of what they
look for.
Todays style-conscious woman is mainly seeking quality and lasting value, with 80%
willing to pay more for accessories that will last more than one season, leading to marked
preference towards classic brands. According to Bain & Co. and VOGUE, in 2010, 65% of the
sales were of classic brands. Additionally, customers also seek for heritage with 60% of style-
26
conscious women willing to pay extra for brands with a strong heritage. It is also important to note
that 30% of Americans, Europeans, and Japanese say they are most likely to pay full price for an
item that is classic, since products that can never be bought on discount, are more valuable,
durable, and a good investment. In China, more than 50% of luxury goods consumers said that the
more expensive the product, the better they consider its quality also favoring the purchase of the
higher-end artisanal products. However, many analysts belief that the large luxury goods
companies cannot afford to rely on the High Net Worth Individuals consumers, who should be left
to the smaller brands of true artisanal luxury, such as Herms and Bottega Veneta, specially with
more than 40% of Americans and almost a third of Europeans, only willing to buy luxury goods
only when they are on sale. Another trend is the growing desire for Ecolux due to the consumers
desire for responsible and guilt free shopping, with 30% of style-conscious women willing to pay
extra for products based on sustainability, although by definition the leather goods industry can
not be green luxury companies can otherwise contribute to society to help make consumers feel
guilty-free when purchsing luxury leather goods. Finally, concerning male customers there is a
marked trend, especially in Asia, of increasing men spending in leather goods.
When talking about leather goods, undoubtedly, the main product category is handbags since
the it bag phenomenon started. Although this phenomenon is now coming to an end as women
opt for the classics, the interest of women in handbags remains, as part of the self-rewarding
phenomenon. Todays consumers often opt to forgo costly apparel purchases and instead choose
accessories that serve both functional and decorative purposes and are easy to buy due to the one
size fits all factor.
One of the main issues the luxury industry is facing right now is the shift in consumer
behaviour patterns due to a change in preferences as a consequence of the recession. This is why
27
understanding where luxury sales are made and what people in each market look for is important.
The following image shows the geographic mix of global luxury goods sales in 2010.
Image 2- Geographic Mix Of Global Luxury Goods Value Sales, % Share 2010
Euromonitor International (2011), How Global is the Global Luxury Goods Market.
Consumer motivations for buying luxury products are often linked to their social, political
and economical environments. However, we can generalize that the desire for the exceptional
has become a trend amongst the luxury buying consumers. With luxury purchases becoming more
deliberate, consumers expect more made-to-measure products and services tailored to their
specific needs.
VII.
CONCLUSION
Luxury goods typically are inelastic since luxury goods consumers are typically not very
price sensitive. However, the economic crisis of the last few years was the tipping point for several
changes in consumer preferences and the competitive landscape. Today, consumers are less
interested in purchasing luxury goods as status symbols and more focused on the actual value of
28
the product. Therefore, companies that can play up their heritage and craftsmanship should
highlight it, since it is this element of uniqueness that allows the brands to command higher prices
and make the product unsusbtitutable in the consumers mind. Overall demand for luxury leather
goods will continue to increase, it is up to the brands to rethink there strategies in order to satisfy
this new consumer trend. Furthermore, this trend has brought about the end of the it bag
phenomena, which led women to seek the ultimate bag of the season and forced them to purchase
a new bag each season. As we know leather scarcity has put a strain on the supply of final leather
goods manufactured by the brands, therefore, the end of this trend or phenomena might also be
beneficial for the brands if they adequately change there business strategies to remain profitable.
With this change the gap between supply and demand is reduced in terms of volume but not
necessarily value since consumer are also willing to buy at a higher price-point.
29
VIII.
REFERENCES
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Shape the Global Luxury Market. McKinsey & Company. December 2010
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Bain & Company in cooperation with VOGUE, Why She Shops:The 2010 Fashion and
Beauty Study. September 2010
Bellaiche, J., Mei-Pochtler, A. and Hanisch, D., The New World of Luxury: Caught
Between Growing Momentum and Lasting Change. The Boston Consulting Group.
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%2Epdf
China Daily, G20 Leaders Push Global Economic Reforms Friday. September 2009
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Claudia DArpizio, Altagamma 2011 Worldwide Markets Monitor. Bain & Company and
Fondazione Altagamma. October 2011
Comit Colbert, Luxury: A Growth Driver For 21st-Century Europe. December 2008
Christian Dior Consolidated Highlights 2010
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Datamonitor, Industry Profile: Global Apparel, Accessories & Luxury Goods. April 2011
Datamonitor, Industry Profile: Global Luggage and Leather Goods. June 2010
David Jones, Hermes breeds own crocs to meet bag demand, Reuters. June 2009
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Diamond, J. and Diamond, E., The World Of Fashion, , Fairchild Books, Inc. New York,
4th Edition, 2008
Euromonitor International, How Global is the Global Luxury Goods Market. May 2011
Euromonitor International, Absolute luxury rides high in recession. April 2010
Euromonitor International, Consumers express status through lifestyle choices and not just
luxury purchases. May 2010
Euromonitor International, How the green wave is shaping the luxury goods industry.
June 2010
Euromonitor International, Is luxury in rehab?. May 2010
Euromonitor International, Luxury brands forced to address their brand heritage to stay
afloat. May 2010
Euromonitor International, Luxury Brand Routes to Market: Exclusivity vs Expansion.
April 2011
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Ferragamo Annual Report 2010

http://group.ferragamo.com/en/downloads/SF_Group_Consolidated_Annula_Report_IFRS
_31.12.10_draft_english_version_final_clean.pdf
Herms Annual Report 2010
http://finance-en.hermes.com/content/download/517/3635/version/1/file/RAHERMES_2010_GB.pdf
Hoovers
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New York. 2008
Jean-Marc Bellaiche, Antonella Mei-Pochtler, and Dorit Hanisch, The New World of
Luxury Caught Between Growing Momentum and Lasting Change, Boston Consulting
Group. December 2010
Lauren Sherman, Worlds Most Powerful Luxury Brands. Forbes. August 2009.
http://www.forbes.com/2009/05/01/powerful-luxury-brands-lifestyle-style-luxurybrands_print.html
MillwardBrown, BrandZ Top 100 Most Valuable Global Brands. 2011
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Luxury Key Figures 2010.
Mulberry Annual Report 2010
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df
PETA
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PPR- Gucci Group Annual Report 2010
http://www.ppr.com/sites/default/files/publications/web_PPR_RA_2010_GC_GB_0.pdf
Prada Annual Report 2010
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h&AN=65486785
31
IX.
APPENDIX
Exhibit 1- Worldwide Personal Luxury Goods Market Trend (1995-2011E, B)
Source: Claudia DArpizio, Altagamma 2011 Worldwide Markets Monitor. Bain & Company and
Exhibit 2- Value Of Luxury Leather Goods (2009-2011E, B)
Source: Claudia DArpizio, Altagamma 2011 Worldwide Markets Monitor. Bain & Company and
Exhibit 3- Top Luxury Brands
Source: MillwardBrown, BrandZ Top 100 Most Valuable Global Brands. 2011

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LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

INDUSTRY COMPETITIVE ANALYSIS

BY: Violeta Cebreros

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

SUPPLY OF LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

THE LUXURY LEATHER GOODS INDUSTRY

LUXURY LEATHER GOODS

Table 1- Sale Shares By Geographic Area

LUXURY LEATHER GOODS

MACROECONOMIC ENVIRONMENT SHAPING THE BUSINESS LANDSCAPE

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

Increasing consumer consciousness and switch in consumer preferences, especially in

LUXURY LEATHER GOODS

Leather has a considerable environmental impact as it shares responsibility for the

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

KEY INDUSTRY PLAYERS

LUXURY LEATHER GOODS

LUXURY LEATHER GOODS

Table 2- Key Industry Players At Brand Level

Core Business- Origial

Leather Goods- Luggage

Leather Goods- Leather

Leather Goods- Handbags

Gucci Group NV Gucci

Leather Goods- Leather

Leather Goods- Leather

Leather Goods- Saddles

Fashion- Haute couture

Fashion- Haute couture

Leather Goods- Leather

LUXURY LEATHER GOODS

MillwardBrown, BrandZ Top 100 Most Valuable Global Brands. 2011

LUXURY LEATHER GOODS

Table 3- Key Industry Players At Group Level

LUXURY LEATHER GOODS

Total revenues: 1,501m in 2011

LUXURY LEATHER GOODS

THE FIVE FORCES MODEL

BARGAINING POWER OF SUPPLIER

LUXURY LEATHER GOODS

BARGAINING POWER OF BUYERS

LUXURY LEATHER GOODS

THREAT OF SUBSTITUTE GOODS

LUXURY LEATHER GOODS

THREAT OF NEW ENTRANTS

LUXURY LEATHER GOODS

RIVALRY AMONG EXISTING COMPETITORS

LUXURY LEATHER GOODS

INDUSTRY DYNAMICS & INTERACTION AMONGST PLAYERS

LUXURY LEATHER GOODS

DEMAND AND SUPPLY OF LUXURY LEATHER GOODS