Luxury goods

The Mercedes-Benz S-Class is an example of a luxury good.

In economics, a luxury good is a good for which demand increases more than proportionally as income rises, and is a contrast to a "necessity good", for which demand is not related to income.

Luxury goods are said to have high income elasticity of demand: as people become wealthier, they will buy more and more of the luxury good. This also means, however, that should there be a decline in income its demand will drop. Income elasticity of demand is not constant with respect to income, and may change sign at different levels of income. That is to say, a luxury good may become a normal good or even an inferior good at different income levels, e.g. a wealthy person stops buying increasing numbers of luxury cars for his automobile collection to start collecting airplanes (at such an income level, the luxury car would become an inferior good).

Defining luxury

The concept of luxury has been present in various forms since the beginning of civilization. Its role was just as important in ancient western and eastern empires as it is in modern societies. With the clear differences between social classes in earlier civilizations, the consumption of luxury was limited to the elite classes. It also meant the definition of luxury was fairly clear. Whatever the poor cannot have and the elite can was identified as luxury. With increasing ‘democratization’, several new product categories were created within the luxury market which were aptly called – accessible luxury or mass luxury. This kind of luxury specifically targeted the middle class (or what is sometimes termed as aspiring class). As luxury penetrated into the masses, defining luxury has become ever so difficult.

In contemporary marketing usage, Prof. Bernard Dubois defines ‘luxury’ as a specific (i.e. higher-priced) tier of offer in almost any product or service category. However, despite the substantial body of knowledge accumulated during the past decades, researchers still haven’t arrived on a common definition of luxury. Many other attempts have been made to define luxury using the price-quality dimension stating higher priced products in any category is luxury. Similarly, researchers have used the uniqueness aspects of luxury too. Prof. Jean-Noel Kapferer, takes an experiential approach and defines luxury as items which provide extra pleasure by flattering all senses at once. Several other researchers, focus on exclusivity dimension and argue that luxury evokes a sense of belonging to a certain elite group.

Socioeconomic significance

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18 or more karat gold jewelry is an example of a luxury good.

Several manufactured products attain the status of "luxury goods" due to their design, quality, durability or performance that are remarkably superior to the comparable substitutes. Thus, virtually every category of goods available on the market today includes a subset of similar products whose "luxury" is marked by better-quality components and materials, solid construction, stylish appearance, increased durability, better performance, advanced features, and so on. As such, these luxury goods may retain or improve the basic functionality for which all items of a given category are originally designed.

There are also goods that are perceived as luxurious by the public simply because they play a role of status symbols as such goods tend to signify the purchasing power of those who acquire them. These items, while not necessarily being better (in quality, performance, or appearance) than their less expensive substitutes, are purchased with the main purpose of displaying wealth or income of their owners. These kinds of goods are the objects of a socio-economic phenomenon called conspicuous consumption and commonly include luxury vehicles, watches, jewelry, designer clothing, yachts, as well as large residences, urban mansions, and country houses.

Market characteristics

Some luxury products have been claimed to be examples of Veblen goods, with a positive price elasticity of demand: for example, making a perfume more expensive can increase its perceived value as a luxury good to such an extent that sales can go up, rather than down.

Although the technical term luxury good is independent of the goods' quality, they are generally considered to be goods at the highest end of the market in terms of quality and price. Classic luxury goods include haute couture clothing, accessories, and luggage. Many markets have a luxury segment including, for example, automobile, wine, bottled water, tea, watches, jewelry, high fidelity, and chocolate.

Luxuries may be services. The hiring of full-time or live-in domestic servants is a luxury reflecting disparities of income. Some financial services, especially in some brokerage houses, can be considered luxury services by default because persons in lower-income brackets generally do not use them.

Luxury brands

Armani is an example of a luxury brand for clothing.

A luxury brand or prestige brand is a brand for which a majority of its products are luxury goods. It may also include certain brands whose names are associated with luxury, high price, or high quality, though few, if any, of their goods are currently considered luxury goods.

Another market characteristic of luxury goods is their very high sensitivity to economic upturns and downturns, high profit margins as well as prices, and very tightly controlled brands.

For example, following a nearly crippling attempt to widely licence their brand in the 1970s and 1980s, the Gucci brand is now largely sold in directly-owned stores. The Burberry brand is generally considered to have diluted its brand image in the UK in the early 2000s by over-licensing its brand, thus reducing its cachet as a brand whose products were consumed only by the elite.

LVMH (Louis Vuitton Moet Hennessy) is the largest luxury good producer in the world with over fifty brands, including Louis Vuitton, the brand with the world's first designer label. The LVMH group made a profit of €2bn on sales of €12bn in 2003. Other market leaders include PPR (after it purchased the Gucci Group) and Richemont.

A rather small group in comparison, the wealthy tend to be extremely influential. Once a brand gets an "endorsement" from members of this group, then the brand can be defined as a true "luxury" brand. An example of different product lines in the same brand is found in the automotive industry, with "entry-level" cars marketed to younger, less wealthy consumers, and higher-cost models for older and more wealthy consumers. The least expensive Mercedes-Benz sold in the United States is the C300 sedan at $32,000, and the most expensive model is the Mercedes-Benz SLR McLaren coupe at $497,000.

The advertising expenditure for the average luxury brand is 5-15 % of sales revenue. This rises to about 25 % with the inclusion of other communication such as public relations, events and sponsorships.

Market size

The luxury goods market has been on an upward climb for many years. Apart from the setback caused by the 1997 Asian Financial Crisis, the industry has performed well, particularly in 2000. In that year, the world luxury goods market – which includes drinks, fashion, cosmetics, fragrances, watches, jewelry, luggage, handbags – was worth close to US$170 billion and grew 7.9 percent. The largest sector in this category was luxury drinks, including premium whisky, Champagne, Cognac. This sector was the only one that suffered a decline in value (-0.9 percent). The watches and jewelry section showed the strongest performance, growing in value by 23.3 percent, while the clothing and accessories section grew 11.6 percent between 1996 and 2000, to US$32.8 billion. North America is the largest regional market for luxury goods: unlike the modest 2.9 percent growth experienced by the Western European market, the North American market achieved growth of just under 10 percent. The top ten markets for luxury goods account for 83 percent of the market, and include the U.S., Japan, Taiwan, Germany, Italy, France, UK, Brazil, Spain, and Switzerland.

Market trends

The three dominant trends in the global luxury goods market are globalization, consolidation, and diversification. Globalization is a result of the increased availability of these goods, additional luxury brands, and an increase in tourism. Consolidation involves the growth of big companies and ownership of brands across many segments of luxury products. Examples include LVMH, Richemont, and PPR, which dominate the market in areas ranging from luxury drinks to fashion and cosmetics. Leading global consumer companies, such as Procter & Gamble, are also attracted to the industry, due to the difficulty of making a profit in the mass consumer goods market.

Luxury Shopping

Another phenomenon of the luxury market are "Luxury Shopping Avenues". Certain Streets like the Milan Via Monte Napoleone, Paris Champs Elysees or the New York 5th Avenue become global shopping windows and places where the luxury brands want to be represented. These retail districts concentrate luxury-type stores that are managed by large corporations, while conventional and independent retailers are pushed out because of increasing rent and real estate prices.

See also

• Commodity fetishism
• Designer label
• Wealth effect