Autumn/Winter 2013

IBR

INTERNATIONAL BUSINESS REVIEW

LUXURY PUBLISHED BY STUDENTS OF THE WHARTON SCHOOL

ABOUT about us

The International Business Review is a student-run print publication based at The Wharton School of the University of Pennsylvania. Going beyond the scope of the American economy, IBR covers a diverse array of business trends throughout the world. We feature thought-provoking, analytical articles written by University of Pennsylvania undergraduates and interviews with international business executives and the renowned Wharton school faculty. With every issue, IBR aims to provide a global forum to exchange ideas, opinions and perspectives on economic issues, as well as to enhance communication and spark debate amongst students, faculty, alumni and the business community alike.

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about Wharton Founded in 1881 as the first collegiate business school, the Wharton School of the University of Pennsylvania is recognized globally for intellectual leadership and ongoing innovation across every major discipline of business education.

With a broad global community and one of the most published business school faculties, Wharton creates economic and social value around the world. The School has 5,000 undergraduate, MBA, executive MBA, and doctoral students; more than 9,000 participants in executive education programs annually and a powerful alumni network of 92,000 graduates.

Editor-in-Chief Lauren Zakarian-Cogswell

FROM THE EDITORS

Managing Editor David Hirschy Design Director Rebecca Friedemann Assistant Design Director Katie Shao

Please excuse us as we indulge ourselves, and you, in luxury. In this issue of the International Business Review, our staff strives to answer the question, “What is luxury?”

From an interview with renowned Wharton marketing professor Jonah Berger to articles about the rise of experiential luxury and the emerging demands of Russian oligarchs, we hope to provide clarity to this exclusive and often inaccessible—yet indispensable—segment of the retail industry. In a descriptive piece that is the first of its kind in IBR’s history, we seek to uncover the definition of luxury cuisine through the eyes of writer Katie Holbrook, as she travels to Paris to sample world-renowned Chef Julien Roucheteau’s gastronomical arrangement at Le Table du Lancaster on the Champs Elysees.

Per our discussion with Director of Jay H. Baker Retailing Center Barbara Kahn, retail is growing as a concentration amongst Wharton undergraduates, which makes our focus on this segment of consumerism particularly timely. Furthermore, the nature of this class of retail is especially interesting to the Millennial generation of business leaders for its ability to withstand economic recession. However, luxury is not limited to garments and handbags, as evidenced by our conversations with Marc Chaya (CEO of visionary perfumery Maison Francis Kurkdjian Paris) and Craig Reid and Robin Brown (Four Seasons President Hotel Operations for the Americas and former General Manager of Four Seasons Boston, respectively).

In short, luxury is a more robust concept than what is credited to it by its textbook definition as an industry segment characterized by a high price point, exclusivity, singularity and non-conforming behavior with the law of demand. There are intricacies to luxury goods and services markets beyond a simple economic model, the understanding of which can inform both future and current industry members and consumers.

We hope that you will gain as much joy and insight from this special, 64-page edition of IBR as we experienced producing it. Like we mentioned earlier, indulge yourself.

VP Distribution Rachel Fleszar VP Finance & Sponsorship Tiffany Tzeng VP Operations & Techonology Matheus Lara VP Subscriptions Yamini Nabar Editors James Calvo Allison Collins Shana Mansbach Head Copyeditor Emily Weiss Business Team Fritz Claessens Ara Garibyan Matheus Lara Vani Mohindra Gabriella Zacarias Design Team Monika Haebich Vivianna Lin Monica Ng Marilyn Yang Special Contributor Christia Donohue Marco Antonio Marcondes Pereira Writers Alicia Chon Gabriel Ferrante Rachel Fleszar Katie Holbrook Sue Jia Kristina Kulik Vivianna Lin Larry Liu Vani Mohindra Lili Peng Lynda Yang Web Development Lee Hampton Tanay Jalan Shray Kapoor Joaquin Gonzalez Milburn

Lauren Zakarian-Cogswell W’15 Editor-in-Chief

David Hirschy W’16 Managing Editor

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Four Seasons Hotel Philadelphia Celebrates 30 Years of Hospitality to the City

BY CHRISTIA DONOHUE

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he year was 1983. “Every Breath You Take” by the Police and Michael Jackson’s “Billie Jean” were blaring from boom boxes everywhere. You couldn’t decide which neon color of the hot new Swatch Watches to wear and at work, a new computer program named “Multi-Tool Word” from Microsoft was being hyped to take word processing to a new level. Meanwhile, in Philadelphia, the city’s first luxury hotel brand was opening, creating a reverberating buzz throughout town. “We’ve made it,” was the common sentiment expressed by locals, honored that Four Seasons Hotels & Resorts had chosen their city to open one of its first US hotels.

With that feeling of pride and nostalgia guiding them, Four Seasons Hotel celebrated its thirtieth anniversary this fall during

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the 30 days of September, highlighting all that has made the hotel shine brightest over the years.

The recognitions began by honoring its most important asset – its staff. The hotel had 22 employees who have worked for the hotel since opening in 1983. From three doormen, who are the first face of the hotel, to the director of security to the hotel’s employee café chef, each one plays a very different, yet important role in making Four Seasons Hotel Philadelphia what it has become.

“Our greatest asset at Four Seasons is our people and with dozens of employees who have been here since we opened our doors, it’s a real testament to the culture of the hotel and their dedication to our guests,” said Brent Martin, the hotel’s general manager.

“They are not only a part of our family, but many are like family

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to our guests whom they have made feel at home visiting Philadelphia for thirty years. From celebrating their weddings to welcoming them on business trips, these employees offer a familiar face to thousands of guests and truly the heartbeat of the hotel.”

To give back to the Philadelphia community at large, Four Seasons launched a special giving campaign via Facebook called 30 Days, 30 Ways in which they asked the public to nominate non-profit organizations in Philadelphia who they believed would be making a difference in the city for the next 30 years. A committee of community leaders was assembled including hotel management, Meryl Levitz, president and CEO of Visit Philadelphia, and a representative from Young Involved Philadelphia to choose which organizations would receive the ultimate Four Seasons Hotel Philadelphia experience package worth $1,000 that they could use as a valuable fundraising tool. After a two-week nomination period, the hotel received close to 200 nominations and each day in September, announced a new winner. Some of the local organizations recognized included The Attic, Philadelphia Reads and Pegasus Riding Academy for the physically and mentally challenged.

“The 30 Days, 30 Ways campaign was one of the most rewarding parts of our anniversary celebration,” commented Ann Armstrong, director of marketing. “We learned so much about the amazing non-profit organizations that are making a difference in Philadelphia. It gave us so much hope for the vibrant future the city has for visitors and locals, alike.”

As a nod to its prime location within Philadelphia’s renowned Parkway Museums District, Four Seasons Hotel partnered with the City of Philadelphia Mural Arts Program, the internationally acclaimed program for mural arts based in Philadelphia, to create its own mural with artist David Guinn. Located on the side of the hotel facing the busy Benjamin Franklin Parkway and Logan Circle, which thousands of people drive and walk through each day, the “Rush of Seasons” mural depicts four of Philadelphia’s most recognizable cultural institutions and landmarks, as seen throughout the four seasons of the year. Founder of the Mural Arts Program, Jane Golden, joined general manager, Brent Martin for the special dedication.

No celebration at Four Seasons would be complete without a very special dinner in the hotel’s Five Diamond, Five Star Fountain Restaurant, which continues to win awards after 30 years, including this year’s “Best Fine Dining Restaurant” in Philadelphia Magazine. A group of the city’s dignitaries and the restaurant’s top guests over the years were invited to a private dinner prepared by Chef de Restaurant William DiStefano. The occasion was also used as a fundraiser for the Cancer Center at The Children's Hospital of Philadelphia, the hotel’s Parkway Run partner and beneficiary.

In contrast to the formal Fountain dinner, the hotel also hosted a large public anniversary

party, touting on the invitation that they would be ‘partying like it’s 1983.’ Armed with neon glow bracelets for all guests and Rubik’s cubes scattered on the tables, over 200 guests gathered for a warm evening in the hotels outdoor courtyard. A DJ spun the top hits from the 80’s while guests dined on retro-inspired food and desserts, including a huge cake and Pac Man cookies. During the party, Four Seasons also launched its fall "Beer Four All Seasons" exclusive craft beer collaboration with local brewery, Dock Street Brewing Co. called 1983: Beer of Excellence – a celebratory champagne style brew.

The month-long celebrations ended with a capstone event- the Four Seasons Parkway Run & Walk for the Cancer Center at The Children’s Hospital of Philadelphia. The Parkway Run & Walk is the single largest fundraiser for the Cancer Center, growing exponentially each year. The annual event has raised millions of dollars for CHOP over the years; however, no one year raising over $1 million in itself. This was the year that goal was set. On the crisp Sunday morning of September 29, a record 10,371 participants turned out to walk and run the race. Together with corporate sponsors, individual donors and participant fundraising, the $1 million goal was exceeded, with $1,009,941 being donated to the Cancer Center at CHOP during Four Seasons’ 30th anniversary year.

From giving back to the community and supporting over 400 employees daily, to being a ‘home away from home’ for thousands of business and leisure traveler guests each year, Four Seasons Hotel Philadelphia has proven its tremendous dedication to Philadelphia since 1983. As the hotel looks to 2014, it’s poised to continue its prominent role as a leader in hospitality in Philadelphia. IBR

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Four Seasons launched its fall "Beer Four All Seasons" exclusive craft beer

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TABLE OF CONTENTS

LUXURY 2.0: DELIVERING EXCLUSIVITY IN A DIGITAL AGE PAGE 9

TABLE DU LANCASTER: CLASSIC ELEGANCE IN NOUVELLE CUISINE

THE PSYCHOLOGY OF TOP SHELF PURCHASES PAGE 12

PAGE 42

INTERNATIONAL PERSPECTIVES ON LUXURY PAGE 61

THE RISE OF EXPERIENTIAL LUXURY PAGE 40

LUXURY BRANDS AND THE RISKS OF COMPARATIVE ADVERTISING IN BRAZIL PAGE 49

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HIGH-FLYING HORSES: THE SPORT AND THE BUSINESS OF EQUESTRIANISM PAGE 26

FINDING A PLACE FOR HAUTE COUTURE PAGE 36

WILL CHINA’S AGING AND WEALTHY PAY FOR WESTERN-STYLE RETIREMENT LIVING? PAGE 6

THE RUSSIAN ELITE ACROSS BORDERS PAGE 47

LUXURY FAST FASHION, AS DEFINED BY UNIQLO PAGE 28

THE GROWTH OF NIGERIAN LUXURY SPIRIT CONSUMPTION PAGE 14

FEATURED CONTENT: THE BUSINESS OF LUXURY COMFORT: A LOOK INTO THE FOUR SEASONS FORMULA FOR SUCCESS PAGE 16

FACULTY INTERVIEW: PROFESSOR BARBARA KAHN PAGE 30

PROFESSOR JONAH BERGER ON CONTAGIOUS LUXURY PAGE 52

THE BUSINESS OF SCENT: INTERVIEW WITH MARC CHAYA PAGE 54

IBR’S FAVORITE BRANDS AUTUMN/WINTER 2013

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Will China’s Aging and Wealthy Pay for Westernstyle Retirement Living?

BY LYNDA YANG W’16

What is the next big trend in the real estate market in China? When high-net-worth individuals—those with more than 1 million USD in investable assets—start to worry about their residencies after retirement, the need for highend senior housing in China emerges, attracting foreign real estate enterprises.

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he forces behind the maturity of high-end senior housing in China The first generation of wealth in China, a special group of people who prospered under Deng Xiaoping’s Economic Reform and Open Policy, is now reaching retirement. The aging of this generation is accompanied by the difficulty of single children to provide sounding care to their parents. As a result of the “One-Child Policy”, people born after the 1980s now face the burden of caring for two parents and four grandparents. Under traditional Chinese filial piety, the ideal family structure is called “Si Dai Tong Tang”—“four generations living under the same rooftop.” Younger generations who send their parents and grandparents to senior houses are considered to be abandoning and even betraying the elders. In addition, for most people, a senior house does not evoke a pleasant image. It is narrowly defined as a nursing home; a place where the elderly must turn if they cannot live independently and have no support from their children.

The living condition is dormitory-like, with everyone following the same daily schedule under supervision. There is no concept of independent living, assisted living, nursing and acute care, as in the senior housing industry in the US. However, the inability of single child to take care of parents at home and the conflicting lifestyles between two generations create inconvenience for both sides. This has softened the previously re-

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sistant attitude towards out-of-home care. Therefore, seeking help from professional services has become more widely acceptable today, helping to facilitate the growth of senior housing market.

The investment history of these high net worth individuals also bodes well for the high-end senior housing market. According to a joint study by China Minsheng Bank and McKinsey & Company in 2012, 31% of the assets of Chinese high net worth individuals were allocated to real estate, making it the category that gains more investment than any other financial products. Furthermore, 61% of the high net worth individuals interviewed in this study expressed their willingness to increase their share in real estate. Considering that in the previous decades, the performance of real estate market in China has rarely disappointed investors, it is not surprising to expect more investments in the sector. However, a potential real estate bubble burst has turned more investors to purchase properties that are suitable for future self-use, as opposed to assets for purely speculative purposes. The next property in which they are likely to invest is the place where they plan to live after retirement. In this regard, what attracts Chinese buyers—warm weather, good air quality, natural environment, safe food and comprehensive health care—is not much different from what is desired by their counterparts in developed countries, which creates opportunity for foreign retirement property developers to enter the market.

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For the foreign investors, the shift of demography is not the only factor that contributes to the maturity of high-end senior housing industry. Previously, the Chinese government enforced restrictions on foreign companies entering senior housing industry. However, in 2011, the government loosened up relevant regulations and welcomed foreign and private involvement, permitting overseas companies to own 100% of an operation in China.

This is a reaction to the increasing aging problem in China. It is estimated that the 60-and-older population will rise to 300 million by 2030, the equivalent of current total US population. The government has listed senior care as a high priority in its current “Five Year Plan”.

The pioneers in the underserved market The earliest foreign investments in China’s high-end senior housing market dates back to 1998, when the US senior housing company Holiday Retirement Corp tried to build a retirement community in Shanghai’s outskirts. However, the timing was wrong. The market demand had not yet matured, and the concept of “high-end senior housing” had not gained wide acceptance. Eight years later, the Holiday Retirement Corp had to convert the housing project into a budget hotel and retreated from the market. Like the Holiday Retirement Corp, many other early foreign investors entering the senior housing market in China found themselves facing cultural, financial and administrative barriers. It requires patience and financial strength to introduce the concept of private senior care to the market, to build relationships with the government and to forge local partnerships.

The local pioneer on senior housing real estate is Zhu Fengbo, chairman of the board at Beijing Sun City Group. He foresaw the market opportunity in 1999 and started the Sun City project in the

outskirts of Beijing in 2001. Unlike Holiday Retirement Corp’s venture, his project received positive market response – a sales rate and rental rate of 100% today. Unlike the Holiday Retirement Corp, he took the project to a larger scale by creating a whole community.

The 250,000-square-meter project includes a first-class hospital, a supermarket, and a nursing home for rental. To ensure fast response, an ambulance from the hospital can reach any apartment in the Sun City within five minutes of an emergency call. Cleaning services, customized meal deliveries, and routine health checks are available. Elderly residents can also get involved in social activities such as drama performances with their neighbors. However, the success of Sun City in Beijing is not easily replicable today. After a decade, opportunities for large-scale land acquisition in places with close proximity to the first-tier city, where high net worth consumers mostly reside, have become more and more rare. Building and developing a first-class hospital in a private housing project also requires financial strength, connections and time.

Players in the Market Today Starting last year, the high-end senior housing market in China today has seen increasing numbers of local and foreign players who are testing whether the aging class will pay for Western-style retirement living.

In 2012, China Vanke Co., Ltd., the country’s largest property developer, launched its first pilot senior housing project, the Happy Community in Beijing, and a second one in Qingdao.

In the same year, Cascade Healthcare, a Seattle-based company, opened its first property in Shanghai by renovating a five-story hotel building into a 100-bed senior care center. The company is the first foreign firm fully licensed in the senior housing market in China.

To build its second property in Beijing, Cascade partnered up with

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Sino-Ocean Land, a local real estate developer. In the future, Cascade plans to invest over $100 million in senior housing projects in China.

Another foreign investor with a strong presence in the market is China Senior Care, which is fully owned by the US firm Cypress Garden Senior Living. With its mission to bring high-quality senior care to China, it built a 64-bed facility in Hangzhou and charged a minimum rent of $6300 per month, compared to the $4000-5000 average rent of luxury senior home in the US. Mark Spitalnik, the president and CEO of China Senior Care, has been in the market in China since 2007. “I’ve heard that eight out of the top ten senior housing firms in the US are working on different timeframes of projects in China,” he said, commenting on the recent surge of interests by foreign investors, “We welcome competitors to the country because it will help educate the market, and there’s room for a lot of capacity.”

Companies from other Asian countries are also eyeing the growing opportunity in the market. Ong Chu Poh, the executive chairman for Econ Healthcare Group based in Singapore, provides consulting to the government of Hangzhou on a retirement village.

“There are many local developers who want to come into this huge seniors’ market, and they don’t know how to go about it,” Ong said.

According to NewsChina, the current vacancy rate for high-end nursing homes in Beijing, which charge around 10000 RMB (the equivalent of $1610 in the US) is 90%. This shows that the current high-end nursing home model is far from desirable for its target consumers. In many cases, investments are heavily spent on the building and the interior decoration, but the services need to be upgraded.

What Lies Ahead The history of market entry of foreign-branded hotels in China might act as a model for the foreign investors in China’s high-end senior housing industry. These large international brands have re8

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shaped the standard of high-end hospitality service. For years, the luxury hotel market has been dominated by large international brands, and the three-star hotel market sees intense competition between local brands. While Chinese consumers can easily identify and recall the names of high-end hotels such as Hyatt, InterContinental Hotels Group and Sheraton, such big names have not been established in the senior housing industry since the concept of highend senior living facilities is still considered to be in its infancy.

For foreign senior housing developers, opportunities come with challenges. Finding the right local partner in China is not easy.

Many local developers do not share the vision of purely specializing in the senior housing market and emphasizing health care service.

The typical residential development model in China is to build up property, sell it to whoever can afford the price, and leave for the next project. In addition, specializing in the senior market comes with the risk of losing other buyers, and providing health care services does not generate fast money.

Maintaining high-quality service is the key for long-term success of senior living projects. What the market needs the most from foreign players is their experience with health care service operations.

These foreign players, however, face tremendous challenges, ranging from hiring and training skill workers to getting around with government regulations.

Challenges for foreign investors also come from abroad. The target consumers also have the option of going overseas for retirement and hiring private assistants. Understanding the demographics of this group is critical for attracting their attention and investment.

After all, this is the same group who drove China to the largest market for luxury goods, sent their children to campuses abroad, and collected overseas properties during the financial crisis. Now, they are stepping into their senior years, and they need a place to do so gracefully. IBR

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Luxury 2.0: Delivering Exclusivity in a Digital Age

BY VIVIANNA LIN W’17

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hen shoppers first enter the Oscar de la Renta website, they are invited to receive VIP access to exclusive events and emails. This is followed by a greeting from a sleek, chic spread featuring the season’s newest arrivals and convenient access to a “personal shopper” and live chat.

Another feature called “True Fit” allows users to input their height, weight and body type for unique analyses of their best styles and fits. Oscar de la Renta’s engaging website embodies

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more likely than those earning under $100,000 to make an online purchase in the first quarter of 2013 and, on average, they spent 41 percent more on purchases.

Yet having a digital presence no longer simply means having a user-friendly website. Search is the most popular tool on the Web, and it is an area of discovery and exploration. Mobile will continue to be an essential medium for reaching international, affluent consumers; marketers should work to create an opti-

CONSUMERS BUY PRODUCTS AND SERVICES FROM HAUTE COUTURE BRANDS NOT ONLY BECAUSE THEY SEEK A QUALITY PRODUCT, BUT ALSO BECAUSE THEY DESIRE AN EXPERIENCE THAT SATISFIES.

the rise of the tailored, digital shopping experience.

This development links to the essence of a luxury brand: consumers buy products and services from haute couture brands not only because they seek a quality product, but also because they desire an experience that satisfies. The proliferation of digital technology, particularly among targeted consumers, increases the significance of utilizing these platforms. A recent Luxury Institute study of adults earning $150,000 or more revealed that over 80 percent own a smartphone, and more than half own a tablet. Affluent consumers were shown to be 47 percent

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mized shopping environment on smartphones and tablets. In addition, luxury brands have begun taking advantage of mobile’s geo-location services, which provide valuable information regarding consumer location. For example, the Ritz-Carlton Hotel uses Foursquare to provide local destination tips and concierge services for travelers. In 2010, Jimmy Choo organized a treasure hunt for a free pair of shoes in London via Foursquare.

This innovative event engaged customers both online and off and is a prime example of the advantages of social media.

Also in the mobile space, apps are another platform that have

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just recently begun to transform the luxury market. Apps allow consumers to maximize the use of their smartphone’s best features, such as the accelerometer, camera and GPS. They create a feature-rich, enjoyable user experience that people like spending time on and come back to. Nearly four minutes are spent in-app for every minute spent on the mobile Web. Although apps are not a perfect medium—device fragmentation and searchability are large barriers to consumer accessibility—they provide a more engaging experience for consumers.

Digital is a powerful tool for luxury brands and retailers, but smart marketers keep tabs on their relationships with customers across all channels and look to strengthen them through faceto-face contact. In the end, buying luxury brands is about the experience, not just the product. Luxury marketers will continue to intensify their use of social media to connect with current and prospective customers. PC and mobile Web sites will get a drastic makeover, and applications across Apple and Google platforms will proliferate. The use of digital tools to showcase the brand story will increase, much of it designed to drive traffic in-store, which is the main purpose of such sophisticated mar-

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MARKETERS MUST PUSH THE BOUNDARIES ON DIGITAL TO FIND NEW WAYS TO ENGAGE WITH CONSUMERS AND EVOLVE THEIR ADVERTISING AND MARKETING PRACTICES.

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keting and content.

In this sense, print should by no means be discounted as a marketing platform to draw customers in. While luxury marketers’ focus on imagery can cause print advertisements to easily blend together, such ads can be powerful when correctly executed. The luxury brand ads that stand out are those that pull the focus back to their products. The visual experience is a large part of their marketing, and print is something consumers can hold, touch and remember.

Regardless of the shopping medium, service is key to commerce experiences, and this is even truer when it comes to luxury brands. Marketers can leverage their in-store and online commerce experiences by mirroring the must-have services from each shopping environment across all channels. Interactive content that is personalized for the audience is another key factor in online advertising and should be the main focus of luxury brands this year. Marketers must push the boundaries on digital to find new ways to engage with consumers and evolve their advertising and marketing practices. Luxury shoppers love the premium in-store experience, whether it is the physical store atmosphere or a personal relationship with staff that can make informed recommendations. Consumers also enjoy seeing, handling or trying on products before buying them.

Currently, the main purpose of these multiple platforms is 10

to enhance the overall brand image and experience, as well as to attract physical customers to visit brick-and-mortar stores. The ubiquity of the Internet in developed countries has provided customers with the invaluable power of knowledge and ease of access. Marketers must realize that affluent consumers do extensive research before they enter the store. Consumers constantly go back and forth between physical and digital brand channels, so luxury marketers should create a smooth transition for consumers between platforms in their multichannel approach.

The most effective campaigns can engulf the consumer without compromising the value of the brand.

There has also been a rising online luxury market presence in developed countries. Yoox Group, founded in 2000, is a leading example of successful Internet retailing. With multi-brand online stores such as yoox.com and thecorner.com, Yoox Group has established its presence as a solely-Internet based market, selling overstocked or unsold items from previous seasons due to its collaboration with fashion houses such as Dolce&Gabbana, Gucci, and Diesel. Furthermore, the company manages numerous mono-brand online stores for fashion brands includ-

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ing Valentino, Emporio Armani and Roberto Cavalli. Yoox is appealing to luxury brands as an outlet to reaching customers in over 100 countries. According to Federico Marchetti, founder and CEO of Yoox Group, the online virtual store is potent in its ability to “create a virtuous circle linking multimedia/editorial content and the product, coupling the power of communication and distribution capacity to perfection.” So while most fashion houses currently employ multichannel marketing strategies to drive customers to stores, Marchetti has proven that the solely online store is not only possible, but may very well be the future of luxury marketing.

In developing countries, the e-luxury market has also been rapidly expanding with the advent of digital. In 2013, China surpassed the US as the world’s largest digital retail market. Chinese shoppers have been more willing than shoppers in other markets to use their smartphones to make purchases, are comfortable with third-party payments and online banking, and are happy to rely on third parties for deliveries (as opposed to preferring to pick up products in stores). Digital retailing now is the major influence on their actual purchasing decisions.

The Chinese e-luxury market grew 71% from 2011-2012, and dozens of e-luxury commerce websites have emerged catering specifically to Chinese consumers.

E-commerce is best way for luxury markets to extend to new

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consumers in lower-tier cities. There is tremendous unmet demand in these cities, and relying on traditional brick-and-mortar stores is a costly and time-intensive strategy for expansion.

Currently, Chinese consumers are purchasing massive amounts of products on overseas sites: Such purchases have skyrocketed in the past three years, with the amount doubling annually.

In addition to searching for lower prices, consumers turn to overseas purchasing agents when they have health concerns or want to ensure that a product is genuine. With so many unauthorized retailers already online in China, luxury brands need to adopt a proactive approach to managing their brand in the e-luxury space. An official online presence is critical to effective brand management in China. The massive untapped market in China’s growing middle class is an opportunity luxury companies should capitalize on. Yoox has already set up an office in Shanghai and created a Chinese version of its multi-brand website, thecorner.com. The prices on the mono-brand websites, listed in the local currency, match their counterparts in physical

stores, which is a huge plus for Chinese customers searching for ways to circumvent China’s immense tariffs on imported goods.

Marchetti has quickly moved to gain first-mover advantage in China, which will be critical for the future.

The use of digital media is perfectly encapsulated in Salvatore Ferragamo’s “White Shoe” campaign, which celebrates the label’s roots through both a physical exhibition—“The Amazing Shoemaker” at the Salvatore Ferragamo Museum in Florence— and a microsite that artfully conveys the legends of shoemaking.

The microsite brings the story of Ferragamo’s first shoe to life through a two-minute fantasy film, key art, behind-the-scenes action and a photo gallery. The wondrous, fantasy elements of the campaign appeals to peoples’ innate taste for adventure and provides us a sense of mystery and discovery, beautifully bringing together art and film to elevate consumer experience. Elaborate campaigns such as Ferragamo’s White Shoe have the power to attract diverse audiences and represent the path forward in luxury marketing. IBR

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The Psychology of Top Shelf Purchases

BY VANI MOHINDRA W’17

There are three different wine bottles on the table. They cost $5, $35 and $90 per bottle, respectively. A person is told to drink from the $5 bottle twice. The first time, he is convinced that it costs $5 and the second time, he is told it costs $45. Similarly, he is also told to sample the $90 bottle twice - once, under the impression that it costs $90, and the next time that it costs $10. He samples these different wines inside a functional magnetic resonance image (fMRI) machine, and after his brain scans are developed and evaluated, an intriguing pattern is noticed. The subject’s medial orbitofrontal cortex (mOFC) – also known as the ‘pleasure center of the brain’ – becomes drastically more excited when the he believes he is drinking more expensive wine. Ironically, when the subject samples all the wines without any price tags on them, he thinks that the $5 wine tastes the best. (Hilke Plassmann et al., “Marketing actions can modulate neural representations of experienced pleasantness”, 2007)

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s rational human beings, we often subconsciously weigh the pros and cons of every decision we make. This rationality is essentially the basis of classical economics: when the price goes up, demand goes down. That’s the way markets work—or so the textbooks say. However, when luxury goods come into the picture, there is an evident change in this pattern. Any product that seems to be of a higher price or quality makes us all think and react in ways that are uncharacteristic of homo economicus.

For most goods, price is often seen as a sign of quality. Despite the questionable logic behind this perception, it is apparent that people attach more significance to the price of a product than its actual utility. If looked at from a technical standpoint, the difference between a wellmade non-branded handbag and a Louis Vuitton bag is not immense.

Although the Louis Vuitton may be relatively better crafted, the distinction in the make and styling of the bag cannot rationally be valued at the extra $1500 that Louis Vuitton charges. So, what exactly are consumers paying for, if not for the physical product itself?

The answer lies in prestige, exclusivity and a sense of empowerment.

That extra $1500, for better or worse, buys the consumer social acceptance and pride. Owning a luxury item like the Vuitton purse might not make sense from a rational, economic point of view—t he utility lost from parting with $1500 has been shown to outweigh the gain from 12

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obtaining a purse—but it does impact a consumer’s perception of her social image. This ‘subjective utility’ is the main reason for the inelasticity of luxury goods. Even when price increases exponentially, customer bases of high-end products remain constant. Producers have been able to exploit this phenomenon, since consumers tend to insist on buying luxury products even when financial conditions are adverse. Louis Vuitton Moët Hennessy, for example, was able to increase its bottle price from $135 to $205 in the middle of the global recession, with no harm to its revenues.

However, as behavioral economist Dan Ariely of Duke University points out, luxury goods are not all that bad. According to his new research, brands matter not only because they elevate social standing, but also because they “act as performance boosters.” In other words, they motivate us to work. By providing a theoretically attainable and clear-cut goal, luxury goods provide a metaphorical beacon of light to guide us in this capitalist economic system.

These effects of consumer psychology can be felt on a macro scale as well. With the economic rise of the BRIC nations (Brazil, Russia, India and China) over the past two decades, luxury retailers have targeted these growing consumer markets. Today, the BRIC nations comprise roughly one fifth of the world’s luxury market, and their domestic consumption is projected to continue to rise as their middle classes swell in size. Vari-

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ous projections estimate that by 2015, the BRIC countries will consume around 36% of the total luxury production, making them the largest consumer bloc of luxury products in the world and dwarfing established markets like the U.S., Japan, Italy and France.

Although the BRIC nations are collectively growing in terms of luxury product intake, each country’s consumption is concentrated in a specific sector.

This concentration communicates a sense of what each population seeks to convey to society by owning a particular luxury product.

So far, China has been the frontrunner in terms of stable high-end consumption. This is not entirely unexpected, considering that China is set to become the second-wealthiest nation in the world in a mere four years. Currently, the East Asian powerhouse is already the second-highest luxury consumer, trailing only Japan. On average, data shows that the Chinese citizens have been particularly attracted to outward displays of branded clothing. Companies have been able to exploit this “logo strategy”, in which big-name clothing brands are far more desirable than cheaper and utilitarian options.

This brand-obsessed behavior has been attributed to a social trait called “release phenomena”, which can be seen when political or economic restrictions are lifted off people after a long period of time. In this particular case, Chinese economic reform and the opening up of domestic markets to foreign investment took place only in the last generation. Since then, consumers have increasingly demanded all types of luxury items. If current trends in luxury consumption continue, China’s consumer market will hit $14.6 billion by 2014.

In comparison, India’s consumer base exhibits a very different list of priorities when it comes to luxury products. Compared to the Chinese, Indians are more conscious of utility, aesthetics and brand value. Because of this, customizing luxury goods is typically seen as preferable to simply purchasing the latest trends. Even as early as 1926, demand for custom-made items was extraordinarily high, as kings like the Maharaja of Patiala regularly sent their crown jewels to deluxe designers like Cartier to remodel. Similarly, consumers in India today demand “limited edition” products far more than consumers in other emerging markets.

Responding to this, massive luxury retailers like Louis Vuitton, Burberry and Hermes have changed their marketing strategies to introduce more tailored “India-specific” products, as production managers have finally comprehended that Indians are more obsessed with exclusivity than owning a luxury branded product.

However, outward displays of wealth in India are not uncommon.

Business magnate Mukesh Ambani, the richest person in India, recently finished settling into the most expensive house on earth (priced at US$1

billion), while Lakshmi Mittal, one of the most influential Indians in the world, just threw his daughter the second-most expensive wedding in history, estimated at $60 million. Despite these flashy displays of wealth, it is important to note that India is not yet one of the top luxury brand consumer markets, mainly because the government still places restrictions on imports of international luxury brands into the country.

Russians, on the other hand, merge the habits of Indians and Chinese consumers as they use luxury items to illustrate both social standing and personal tastes. They tend to do this by looking for traditional items that also subtly hint at higher status and social standing. For example, one of the highest selling luxury products in Russia is jewelry. British jewelry designer Stephen Webster explains the extreme demand for luxury and need to elevate personal status by recalling the opening of his first store in Moscow: In the first day alone, 25% of his inventory was sold.

Additionally, he attributes his success to the mannerisms and personality tastes of the Russian nouveau riche mentality, noting that they prize both customized items and clear signaling of wealth. Forbes has estimated that 200 of Russia’s wealthiest have a net worth of over $499 billion, but until wealth spreads beyond the elites of St. Petersburg and Moscow, Russia’s consumer market in luxury goods won’t take off.

The last member of the BRIC nations, Brazil, is currently gearing up to hold two huge global sporting events: the 2014 FIFA world cup and the 2016 Summer Olympics. These two upcoming events themselves are causing massive spending on luxury items like hotels and restaurants.

As a population, however, Brazilians differ from the other three populaces: they tend to focus their spending on domestic luxury goods rather than foreign brands. Local brands hold almost 50% of the luxury retail market in Brazil.

In these emerging markets, luxury consumption is driven by preferential tastes instead of rational choices. Consumers rely on subjective reasoning and biased calculations of utility to rate products, and by doing so, reject the traditional cost-benefit approach. Next time you reach for the designer bag or the top bottle on the shelf, ask yourself: “Why am I choosing this product?” The answer might just reveal a lot more than you’d expect. IBR

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The Growth of Nigerian Luxury Spirit Consumption

BY LARRY LIU W’15

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pirits retailers of Lagos and Abuka are making room on their shelves for bottles of Hennessy and Absolut. The luxury alcohol consumer market in Nigeria is developing rapidly; estimated at $2 billion and increasing by 6% every year since 2007, the market is reflecting Nigerians’ quickly growing taste for pricier distilled beverages. Though the majority of the market share still belongs to cheaper local products, imports accounted for a quarter of the spirit market and the number is growing every day.

The largest market share of imported alcoholic beverages come from four world-renowned companies: Diageo, (the UK company known for Johnnie Walker, Smirnoff and Baileys), Pernod Ricard (maker of Absolut), Davide Campari Milano S.p.A. (Campari and Aperol), and Louis Vuitton Moët Hennessy (Hennessy). With Nigeria’s growing taste for expensive foreign labels, Hennessy Cognac, for example, has been able to increase its bottle price from $135 to $205 from 2008 to 2013.

Remarkably, this huge price jump occurred during the financial crisis, and demand remained steady. East Asia still represents the majority of Hennessy’s sales, but Nigeria represents a strong and growing source of revenue for the luxury provider.

Fueling this new taste for luxury goods is Nigeria’s phenomenal economic growth. Its GDP tripled from $170 billion in 2000 to $451 billion in 2012, while GDP per capita doubled from $1,400 per person to $2,800 in the same time period.

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When taking the informal sector into account, these statistics are even more dramatic: GDP would stand at $630 billion total and $3,900 per capita. This robust growth has moved Nigeria up in the ranks of global annual GDP, from 44th in 2010 to 36th in 2012. Emerging market analysts often consider Nigeria to be one of the major global growth generators, citing its upward trajectory of consumption. A growing middle class helps to drive this consumption; items such as refrigerators and freezers that were once considered luxury are now becoming commonplace in middle-income homes.

The middle class isn’t the only sector of the population that is stocking up on upscale liquor. While 63% of the Nigerian population still lives on less than a dollar a day, the elites, who control the nation’s resources, have appropriated an estimated $600 billion in wealth between Nigeria’s independence in 1960 to 1999. These elites, who are typically oil industry executives, corrupt politicians or start-up business owners, also held an estimated extra $170 billion in foreign accounts in 2003. This relatively small elite has thus been boost their consumption of luxury products, and spirits have not been immune to this trend.

This developing taste for alcoholic beverages reflects a national culture that is largely approving of alcohol. Alcohol has traditionally been consumed in religious rituals, marriage ceremonies, enthronements, cultural festivals and child naming.

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Spirits were imported following the 15th century European conquest, and breweries sprang up during the ensuing colonial era.

Following the country’s 1960 independence, Guinness became the first foreign brewery on Nigerian soil. Liquor consumption has steadily climbed since, and even during the Nigerian eco-

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has seen dramatic increases in revenue, netting a 53% increase from 2008 to 2012 and an increase in net profits from $3.27 billion to $4.52 billion in that same period. Much of their success is explained by consistent sales growth in the African and especially the Nigerian consumer market. As Tokini Peterside,

ACCEPTANCE OF ALCOHOL CONSUMPTION, WHILE HISTORICALLY WIDESPREAD, HAS BECOME EVEN MORE ENTRENCHED AS THE ECONOMY CONTINUES TO BOOM.

”

nomic crisis of the 1980s, many Nigerians remained loyal to alcohol produced by foreign companies.

Acceptance of alcohol consumption, while historically widespread, has become even more common as the economy continues to boom. This is driven largely by the perception among elites that the consumption of alcohol is a symbol of their high-class status. Many are keen to display their bottles of Hennessy and Dalmore Scotch in their private bars to signal their affluence. The middle and lower classes have responded to this perception as well. Television and radio advertisements reinforce the perception that expensive alcohols signal one’s wealth to others.

This consumption of premium alcohol certainly comes at a price. A bottle of champagne may cost anywhere between N8,000 and N150,000 (US$49$926), and is usually on the higher end in night clubs and bars. Recently, a new champagne brand called Angel entered the national market, which had been advertised for N650,000 (US$4014). With champagne consumption increasing from $49 million to $59 million from 2011-2012 and projected to increase to $105 million by 2017, it is clear that Nigerians are willing to pay the price to declare their worth.

Detecting this burgeoning market, spirits companies are flocking to Nigeria. Louis Vuitton Moët Hennessy (LVMH), for example, is trying its best to exploit the market. The company

LVMH’s marketing director in Nigeria, explains, “Nigeria is the largest market in Africa and the Middle East. For Hennessy Cognac, Nigeria ranks among the top ten consuming countries in the world.” As a result, LVMH has doubled its marketing efforts in Nigeria in the hopes of increasing cognac sales even more. These brand and marketing strategies have led the company to develop new products that appeal to the newly rich. Labels like the 2011 Moët Ice Imperial, the first champagne to be consumed over ice, and the Hennessy Classivism, target young and affluent consumers. The company has centered their strategy around the idea of high-quality, creative, bold products and has sought to raise its advertising profile in major events such as sporting competitions, gastronomy events and during movies.

Nigeria’s luxury consumer market is improving, fueled by a spendthrift elite that is benefiting from significant oil revenues. The slowly growing middle class has developed a taste as well, and trends indicate the potential for more lavish consumption from this group in the future.

Despite these promising trajectories, Nigeria will still have to contend with challenges such as enormous wealth inequality, widespread poverty, endemic political corruption, weak human capital development and a poorly-diversified economy. The challenge for spirits companies will be whether they will be ready to serve that growing market. IBR

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Four Seasons Resort in Bali (left); Four Seasons Hotel Gresham Palace Budapest (right)

The Business of Luxury Comfort: A Look into the Four Seasons Formula for Success

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Since its establishment in 1960 by Canadian hotelier Isadore Sharp, Four Seasons has become a household name epitomizing the highest standards in hospitality worldwide. Its service, amenities, design and cuisine are praised and emulated, and have won countless awards and commendations over the years. IBR sat down with Craig Reid, President Hotel Operations for the Americas, and Robin Brown, hotel developer and former General Manager of Four Seasons Boston, to gain insight on what the Four Seasons name represents from managerial, operational and financial perspectives.

BY LAUREN ZAKARIAN-COGSWELL W’15

I

nternational Business Review: Let’s start off by addressing the theme of the issue. How does Four Seasons define and deliver luxury?

Craig Reid: Luxury is about taking care of the needs of your customer in a way that makes them feel comfortable and at ease. It should never be intimidating or threatening. We deliver luxury on multiple mediums: creature comforts, aesthetics, and interpersonal engagement.

Robin Brown: Four Seasons has an extraordinarily powerful and unique skill of recruiting and selecting, and the focus does not necessarily lie within the training. It’s in bringing out in the individuals they select the incredible gift to deliver a level of intuitive service that does not exist with just any hotel or other service environment, period. They consistently, at every interaction and every level in any location in the world, have this ability to provide what Craig described: the personal touch and employee pieces, which are both at such a sophisticated level that is also natural, warm, appropriate, friendly and always on-point. The staff can flex between the needs and the demands of the customers. They inherently and naturally understand that. Nobody else has that ability. That is the incredible gift that they provide.

IBR: Craig, how do you set this operational standard across a region?

CR: I think Robin pointed to the essential element, which is finding, keeping and nurturing the right people. It’s a high-touch business. We are reliant on individuals who can execute that high touch, and they have to have self-confidence. They have to have a great sense of service generosity, so they intuitively want to please. They have to come across as sincere and caring. You cannot teach any of that. You have to find those people and you have to create an environment that will attract a disproportionate number of them. Then you give them tools that serve as structure, support, encouragement and basic guidelines. We do have what I would call a “recipe book of service”: how-to’s and very simple procedures, a lot of which speak to simple items such as how to approach a car that arrives in the drive and how to do so considering timing, posture and connectivity with the guest. Ultimately though, the client impact or the service differentiation comes from the engagement 18

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between the employee and the guest and the energy between them. In terms of implementing certain standards, you have to hire the right person and you have to have your recipe book of basic service standards.

You also have to constantly coach, which we approach a bit like coaching an athlete; you review situations and use best examples to encourage better behavior and you do a lot of storytelling. You constantly have to nurture the employees and reinforce behaviors.

IBR: Where does the emphasis fall when considering the wellness of the staff and of the guests? How do you create an environment where the employees feel well enough that they can focus entirely on the wellness of the guests throughout the day?

RB: I will never forget when Isadore Sharp, our chairman and founder, visited me the first time I was a General Manager in 1988. He arrived in the lobby and said, “Hello,” and instead of going to the offices, closing the door and having a meeting with management or the GM, he turned to me and said, “Robin, let’s go on a walk.” I said, “Absolutely, where would you like to go?” He replied, “Let’s go to the back of the house.”

We got in the elevator and went up, and he said, “Let’s go to the employee locker rooms.” Here, I got caught left-footed, because we went into the men’s locker room and there were coat hangers all over the floor and no benches for the employees—the hotel was fairly new. And Mr. Sharp said, “How are the employees going to sit down and put on their shoes?”

There was a little foyer outside the locker room that had no full-length mirror. To that, he said, “How are the employees going to check their grooming?” Then, he climbed inside the shower stall and checked the vinyl shower drape and the cleanliness. I will never forget it. Issy Sharp, Craig and the team have consistently created that awareness amongst management and ownership: clearly, the employees are the focus, and in a sense, less emphasis is placed on looking at the presidential suite on a visit. The power of that concept is what sets Four Seasons apart.

IBR: That also touches on the idea of how Four Seasons distinguishes itself from its competition. Besides that focus on the staff and the aspect of the personal touch, is there anything that stands out?

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Four Seasons Hotel George V lobby, Paris, France

Isadore Sharp, Founder and Chairman of Four Seasons Hotels and Resorts.

CR: To me, the staff piece is the strongest. If you think about the hotel experience, it’s a combination of a beautiful building, great interior and amenities, but it’s the people that make it come to life. The first three, most companies can copy. We are very proud of our history as innovators. We were one of the first companies on many fronts, including putting bathrobes in guests’ rooms, having remote controls, introducing 24-hour concierge services and gymnasiums, etc. All of those are great innovations that were extremely well-received by the traveling public.

However, all those changes and improvements that we have introduced have become commoditized—everybody else has them. Having said that, innovating and evolving and recalibrating your product to the needs of not only today’s, but tomorrow’s travelers, is fundamental. We devote a substantial amount of time and effort to ensuring that we stay relevant within our niche and that we continue to evolve the product.

That evolution is both with new hotels and with older hotels. Robin referenced Washington and Boston: both those hotels were built in the 1980s. The 80’s was a period that was not distinguished by its architecture, (you notice the late 70’s influence with the low ceilings and darker spaces) and yet if you go into our hotels, you see that they’ve been refreshed and brought forward, and that we’ve added amenities and tailored the service offering to continue to adjust to the needs of today’s guests.

RB: I agree. I think that innovation distinguishes Four Seasons, but also that Four Seasons is always very practical. I think some other companies tend to obsessively innovate in areas that may not be as necessary and overanalyze technology. I never forget being in a world-class hotel where 20

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I am not even able to operate the phone system or the TV remote. Four Seasons does innovate, but they always go back to the basic understanding of what the typical guest is looking for. Four Seasons also has a broad and fantastic demographic of guests. Boston is a good example. We kept students in the Bristol Lounge for burgers still 25 years later. At the same time, royal families use the Four Seasons as their home away from home.

You have such a broad, global perspective of customer demographic, which helps all feel comfortable. It’s more than an art. It is both a science and an art to pull off that experience.

IBR: How do you minimize gaudiness and maximize luxury? How does Four Seasons construct that perfect balance to appeal to the discerning, discreet client?

CR: In the past, we were very reliant on the taste of our chairman, Mr. Sharp. He is an innovator and had a very different understanding of what luxury should be. He visited some of the traditional luxury hotels in Europe and found himself not feeling very comfortable there, yet he recognized that they had many elements that resonated with him: fine cuisine, a very proficient concierge staff, etc. He had also gone to a couple of the mid-service chains here in the Americas, where some of the creature comforts were beginning to be incorporated into the offering, such as air conditioning, swimming pools, very comfortable seating arrangements, living rooms and bars that you felt comfortable lingering in. From that, he came up with the recipe that defined our first generation of hotels. We are now operating at such a scale and in so many different regions that we shared that responsibility with a large

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...SOME OTHER COMPANIES TEND TO OBSESSIVELY INNOVATE IN AREAS THAT MAY NOT BE AS NECESSARY AND OVERANALYZE TECHNOLOGY.

group of architects and designers, but we tried to keep them extremely centered on who our customer is. One of the terms that you used was “discerning”: we are not necessarily trying to appeal to the affluent or famous. We are trying to appeal to the discerning. The discerning could be the bus driver who is celebrating his 25th anniversary and wants a special venue to do so. He needs to feel comfortable. It could be the international rock band or it could be the locals. We try to convey to our designers and architects a design vision centered around both emotional and physical comfort. We don’t always get it right, but we mostly do.

Having said that, in certain settings, such as Paris, our hotel is grander than in other settings, such as Boston. The more understated character of the Boston hotel is appropriate for the Boston community, but when the Bostonian travels to Paris, which is a city of architectural richness with a great heritage that is more ornate, he or she will find that our hotel correspondingly fits into that vision. Our New York hotel is very bold in its architecture and can come across as intimidating, but is very consistent with the city. The hotel in Boston is much more of a living room setting; it is more intimate and comfortable, and is very much in keeping with the character of the city. I don’t think you would go into the Paris hotel and find it gaudy, but if you brought Paris to Boston, it might be intimidating in that community. It’s all about relevance.

RB: A lot of other brands don’t take that local level of appropriate taste and sense of place into consideration. Some are very cookie-cutter in terms of their design from city to city, but others enforce something from another part of the world upon the local environment. They think it relates to their brand, but it is then not appreciated by the locals. I think Craig is right. Taking the bathroom vanity for example, rather than focus on what the design is, how the marble is cut, and how much molding is underneath, Four Seasons will be as much if not more focused on the amount of vanity space and how the light is going to work on that vanity. They have this ability to look at everything from a broader perspective about what the customer’s needs are and obsess over that level of detail.

CR: I will often meet with designers once they’ve prepared a room and usually they have spent so much time concentrating on the aesthetic, but what we do first is measure where the desk chair is relative to the desk, make sure you can slot in the distance of the light switch from the bed, and assess where the towel is in the bathroom in proximity to the shower. I cannot tell you in how many hotels of our competitors, when you go into the bathroom, it looks beautiful, but the bath towels are at the other side of the room. A room can be beautiful, but it must also be functional.

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IBR: How often do you stay in one of your hotels to ensure that everything is functioning as it should be?

CR: Probably 125 nights a year in one of our own hotels and another 25 to 30 in competitors’ hotels. It may be more. In the last twelve days, I’ve spent ten days in our hotels.

RB: We were taking our daughter to a university in Washington, D.C., a few weeks ago and were thrilled to stay at Four Seasons. Having left there 25 years ago, I ran into a dozen employees in the first thirty minutes.

Delivered shortly after we checked in was a big, red envelope. I opened it up, and it was a typed, personal letter on Four Seasons stationary to “Mr. and Mrs. Brown.” The letter was from the concierge saying that “We’re delighted to have you back and it’s fabulous to see you. While your daughter is at Georgetown, which must be stressful, we’ve compiled a list over time and would love your input and ideas. If there’s anything on this list that does not meet your needs, then you know to not hesitate to call and ask us. We can find whatever it is you need.” And it was signed by Mel the concierge: “Your old friend and colleague, Mel.” Enclosed was a five-page document of every store, from bookstores to furniture stores, to the Container Store, to Target—and not just one, but two choices for each, with maps, addresses and phone numbers, and a list of everything that you could possibly think of. Of course, we were under the impression that we had thought of everything and had been shopping for weeks for this occasion, but an hour in, we found ourselves at the Container Store in Virginia. I was deeply touched by this gesture, just considering the sophisticated, professional, thorough approach to the list, and especially to find that I actually needed it.

CR: That reverts back to my words earlier that it required a certain amount of confidence for Mel to take that upon himself without being asked. It was abundantly generous and was more than was needed.

It must have required a lot of time and the foundation for doing was sincere care. He happened to care for Robin, because Robin cared for everybody at the hotel when he was there.

IBR: This transitions perfectly to my next question. Robin, what would you say were the top three attributes or practices that made you such a well-respected and successful GM? RB: I think being warm as a leader, incredibly genuine and trusted are the most important. It takes a lot to earn that trust and seconds to lose it. Building that level of relationship with the employees is essential, and with Four Seasons, you are allowed to do it in your own way. Ethics were an extraordinarily high standard. Camaraderie, fun, a sense of humor

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and a humble and natural sense of leadership were important qualities.

All the Four Seasons GMs are also very entrepreneurial. I really tried to dwell on the basics; we were obsessive about the cheeseburger and the French fries. We created that cheeseburger years ago and it is still a huge seller today—Four Seasons Boston still has probably the best burger in town 25 years later. So, really focusing on the exceptional basics, which not only meant the guests, but also the employees’ uniforms. At Four Seasons, that did not mean the design of the uniforms—it meant that unlike at most hotels, the uniforms actually fit. The final point would be: how everything relates to the community. This may not be as important in certain hotels, but in others, it became evident that what happened inside needed to translate to the environment outside of the building. Representing those same principles to the community helps enormously to make the hotel financially successful.

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linger at the breakfast table and how people want to be engaged when they’re lying by the pool is very different from how they want to be engaged in the public area of an urban hotel. From a guestroom perspective, the fact that guests will use the room multiple times throughout the day in the resort—while they’ll only use it for part of the time in an urban setting—means that the service must be tailored very differently. It’s just the sensitivities; often in resorts, you have people at leisure, sometimes traveling with families or couples there for special occasions.

Creating little vignettes that accommodate that is extremely important.

We do that by having the best employees in the world and empowering them to make decisions that will create those lasting memories.

IBR: What are the financial implications of operating a resort versus a city hotel?

YOU EMBRACE LOCAL TRAITS AND THE QUALITIES OF THE HOTEL: YOU ARE A VENUE OF THE LOCATION, AND YOUR TRAVELERS WANT THAT.

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CR: That last piece is all the more important in a location like Boston.

It’s a traditional town and it has its hometown favorites. There was already a hotel that was in an arguably better location than ours that was very much the place where people went to celebrate anniversaries, weddings, business deals, and so on. We had to knock them off their perch and Robin’s community work demonstrated that the Four Seasons philosophy of treating others how we wish to be treated ourselves extended to the communities where we operate. It opened locals’ attitudes to considering us as initially a competitor, and now not only a part of the community, but a leader in it.

IBR: Craig, you began your career at the company in 1983 at Four Seasons Washington, D.C., followed by Chicago, Boston and Austin, and, more recently, Four Seasons Resort Dallas at Las Colinas, before assuming your current position. Considering the various perspectives you have had, what are the differences in operating hotels in urban settings versus resorts, and what are the brand-wide consistencies?

CR: The brand consistencies include the attitude towards the guest and the need to make the guest comfortable, but the way you make the guest comfortable at a beach or a mountain is often distinctly different from what it takes to make that guest comfortable in a city. Sometimes that means you calibrate the style of service differently and look for a different tempo in how you offer your service and organize your business according to the needs of the location. I just came back from Hawaii, where the management team members wear shorts and un-tucked shirts with Hawaiian motifs on their necklaces. It just would not add to the experience to have them wearing long pants with tucked shirts, looking like some sort of an official or, even worse, wearing a suit. How people 22

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CR: At a very high level, in a hotel environment, you have many different services that you sell. The room is the common denominator and your margins on rooms are higher than on the other services. In a resort setting, you have a variety of other services, and the only way you can be profitable is by either being able to command a very high room rate to subsidize the additional services, or orchestrating the other services in such a way that they are economically feasible. The logistics of getting things in and out of resorts are typically more complex and you are generally dealing with a much larger acreage, which brings up issues such as transportation. Our preferred methodology is to pick venues where we think people will pay a premium on the room that will address many of the other incremental costs so that we do not have to take shortcuts or adjust the service offerings.

IBR: Craig, we slightly discussed your background on the local level at the Four Seasons before you assumed your current position in 2011, where you oversee a region spanning seven time zones. How do you leverage your experience on the local level in your current role on an international level?

CR: Just as you go from one country to another and change languages or accents, as you go to different markets, you change the tone of your service to make it fit the local community. When Robin and I first started going overseas with Four Seasons, most people thought of us as a North American company and many of our clients came from North America. Today our clients come from everywhere. If you went to London twenty years ago, 70 percent of our guests were American.

Today, that number would be about 25 or 30 percent. They are still a large group, but there are also very large groups from Russia, the Middle

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IBR: Robin, from an ownership point of view, what do you look for in a hotel operator?

Craig Reid Biography

RB: At the high end, I look for a business strategy that is going to set you apart and for the ability to execute. You look to an operator that can deliver on the promise consistently and has a proven track record.

Another trait is financial discipline: to deliver on the results and possess the ability to prevent surprises. With a brand like Four Seasons, there may be more difficult business periods, but you will get a consistent and reliable set of circumstances in the forecasts that will allow you as an owner to predict as best you can. Those would be two key elements: the global penetration that is the brand and the ability to drive the market, which includes all the points we touched on today such as innovation.

At Four Seasons, they never sit still. They are still innovating and driving standards. There is an overall focus on the business that is unrelenting and is constantly looking at ways to innovate and improve upon financial and service delivery efficiencies, therefore improving the experience of the owner and the customer.

IBR: Craig, gauging your experience throughout the privatization of Four Seasons by Kingdom Holding Company, Cascade Investment, L.L.C., and a position by Mr. Sharp, what does it mean to be a privately held hotel management company and what differentiates you from your publicly traded competitors, such as the Mandarin Oriental?

As President Hotel Operations for the Americas, Craig Reid is responsible for setting the strategic direction for hotels in Canada, the U.S., and Latin America. The region spans seven time zones and a geographical area larger than any other in the company. Reid joined Four Seasons in 1983 as an Assistant Manager at Four Seasons Hotel Washington, DC. From there he held various positions in Chicago, Boston and Austin, before assuming the role of General Manager and Regional Vice President of Four Seasons Resort Dallas at Las Colinas. In 2007, Craig was promoted to Senior Vice President Operations for the Americas. He has held his current position since August 2011. He was previously a Management Trainee at The Savoy Group, London, before which he earned a degree in Hotel Administration from Westminster College in London. He also attended the Summer Management Program at Cornell University School of Hotel Administration.

CR: When you are a public company, you have to be very sensitive about what you say and when you say it. You have to be superbly sensitive to very small protocols. To acknowledge the fact that you have multiple shareholders and many people who are making financial bets on your performance, you cannot give someone an advantage and at the same time, you cannot communicate something that might be misinterpreted. It’s great to not have that worry now, so there is a certain amount of freedom in that sense. We happen to have very well-capitalized shareholders who have a very strong understanding of the business. They are firm believers in the long-term investment opportunity with Four Seasons and what we have to offer, which I would distill down to a reputation to the public and a commitment from the employees that work for the company, and they have been very sensitive to honor both. I believe that this period we are in now is a time where we can reevaluate how we are doing things, lean on our strengths, and where needed, refresh and reenergize our approach to the business. It’s an exciting chapter for us.

East, Africa and South America. We want to make sure we fit in and resonate with the local community, but that we are still comfortable for the visitor. When I was in Boston, I was a rabid Red Sox fan. When I came to Texas, I became a Rangers fan. If I ever move back to Toronto, I’ll be a Blue Jays fan. You embrace local traits and the qualities of the hotel: you are a venue of the location, and your travelers want that. They want to feel like they are being immersed in the local community and culture and it’s our job to help make their experience reflect that authenticity.

IBR: Kathleen Taylor’s recently announced successor as President and CEO, Allen Smith, comes to Four Seasons from Prudential Real Estate Investors and has an extensive background in asset management. What does this management change signify for the future of Four Seasons?

CR: The other qualities that Allen brings to the table are that he has a phenomenal reputation as a proven leader and is very well regarded in the industry. He also is extremely comfortable with evolving and growing a global organization. He had 23 regional offices while he was at Prudential, overseeing over $50 billion of real estate investments. He’s very comfortable handling what I call “international logistics,” which becomes more complex as you start going further and further away to

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run your business. Allen also has huge credibility in the real estate business and, in essence, we are caretakers for real estate owners. I actually would have been very concerned if we hired a hotelier for the position, because that would not be a very positive signal about those of us who consider ourselves hoteliers and have invested over 30 years in the company. Allen brings significant experience, skills and relationships to Four Seasons and will complement and work effectively with the strong management team we already have in place. I’m looking forward to leaning on the strength that he brings to the table and I’m confident that he is going to lean on the strengths that those of us who are from the hotelier background bring to the table.

Robin Brown Biography

RB: This choice sends a very strong signal from a real estate discipline, which is key to the continued growth of Four Seasons, and I think it also signals an ability to continue to innovate from a real estate and global perspective. To have someone with such a level of expertise from a fund that large and powerful in the real estate world join the company is quite remarkable. The reaction is very positive from everyone in the real estate and hotel world.

IBR: How has Mr. Sharp’s role in the company evolved along the years and how does his involvement manifest itself today?

CR: He has always been the founder and visionary. From a visionary standpoint, he has now delegated to the next generation, but is still very much the founder, spiritual leader, and inspiration to many of us. When I go to Toronto tomorrow, I’m going to meet with Allen [Smith] for dinner, and actually, Issy is going to be there. He’s going to host us at his house for a cocktail first and then coordinate the dinner. He is a man in his eighties, and is still so intimately involved with the company—it’s incredible. He calls me every year at Christmastime to reflect on the year and make sure there is plenty of gas in the tank for the next year.

He is still very connected. While he has delegated many of his traditional responsibilities with respect to day-to-day business operations, he has created discipleship and ambassadorship with many of us who have worked with him for multiple decades.

Robin Brown is currently Principal of Spot-On Ventures LLC, specializing in real estate and technology investments, and President of real estate asset management and development company WB Management LP. He is also on the Board of Directors of charitable e-commerce company BiddingForGood and startup CO Everywhere. With forty years of experience in the luxury hotel business, including twenty years with Four Seasons and eight years with Westin Hotels, Brown formed CWB Boylston LLC in 1996 in association with Stephen R. Weiner to conceive and develop the Mandarin Oriental Hotel and Residences in Boston. In 1988, Brown took on the role of General Manager of Four Seasons Hotel Boston, and maintained this post for thirteen years. Brown began his career at Four Seasons in 1982 as an Executive Committee Member, four years after which he became a Resident Manager at Four Season Hotel Washington D.C. He has also been invited to speak on several occasions by Highgate Hotels, Massachusetts General Hospital, Beth Israel Medical Center, TripAdvisor, the Boston University School of Hospitality Administration and the Wharton School of Business.

IBR: Now for a broader question about the economy and your personal practices: at any given point in time, what are the economic indicators that you each monitor with their impact on your business in mind?

CR: What I look at the most is future bookings. That is an indicator of what is happening, and I am constantly measuring and monitoring trends. The internal indicator that I am most attuned to is guest satisfaction levels, which is one of the areas where our information is less precise because it’s voluntary. Our metrics on financial performance are real and tangible, and we are very effective in measuring employee satisfaction, where we get 95% participation. On the customer side, there is much less participation; nonetheless, our sample is big enough to have a fairly good sense as to whether we are heading in the right direction or not.

RB: It depends on the project. These days, it has been out of day-to-day operations, and now “group room night backlog”, as we like to call it.

From an ownership standpoint, I look at the pace of bookings and track 24

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that on an almost daily basis, as Craig and I used to do. If you are not very careful and disciplined about that, you can tend to take your foot off the gas and your eye off the wheel, and realize thirty to sixty days later that you are not meeting your pace. Backlog of business is very important as a hotel investor. In the real estate world of hotels, we look at interest rates very closely and economics in the local environment is crucial.

We monitor the permitting process and leadership in the city hall and

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Four Seasons Hotel Pudong in Shanghai, China

what’s happening there relative to timing of the permitting of a project.

These days, we are also always keeping a close eye on construction costs and inflation in the construction field, because those numbers can skyrocket. You balance all of those indicators and factors on a regular basis.

IBR: Craig, can you describe the environment at the company at the start of the Great Recession?

CR: We saw the indicators in 2007. I would say in late 2006, we sensed that we were just going to keep on going up. I’ve lived through enough cycles so that when things do get that frenetic, you always sense that there could be a problem, but you never know just how serious it’s going to be. I was certainly shocked by how strong the collapse was, but we knew we would come through it. It’s just a lot of work, because most people get incredibly nervous during those downturns and there are some who are not sufficiently capitalized to navigate through it. Some of our hotel owners found themselves in difficult situations, but the majority, like us, had been through downturns previously and are coming out today stronger than they were when they first went into it.

IBR: What advice would you give to a Wharton student interested in hospitality, particularly striving to become successful at a luxury household name like the Four Seasons?

RB: I think Craig and I would both agree from our own backgrounds that it’s crucial to get experience in the summer and in the winter if you can, in some cases in high school, but certainly in college. Depending on how ambitious you are, you are going to have to recognize that if you choose the hotel business, you’re going to be working when every-

one else is off—it is a big sacrifice. The benefits, however, far outweigh the sacrifice. The experiences that you have with people and individuals from all over the world, the opportunities that the hotel business provides, and the scope of the job within hotels are far broader than the average person realizes. There is a tremendous amount of learning and it is a very lively, practical and fun career. Another takeaway for me would be aligning yourself with the right individuals; both Craig and I, when we started, had fantastic mentors. If you choose the right mentor in life, that is half the battle. If they’re the right choice, they’ll tend to stick with you throughout your career and constantly be there as a sounding board. To select a company that can accomplish a lot of what we have talked about today and can also provide you with the growth and resource in the form of the mentor role that I described—that, to me is essential and is what I would focus on.

CR: Always associate yourself with winners—not only winners in terms of people who have been successful, but also winners in terms of their values. Make sure that they are as excited about you as you are about them, because you will find that they will help you on your way and will give themselves for you in the form of that mentoring piece. Be coachable. We all think that we want to be coached and that we are coachable, but in the professional setting, accepting coaching can be tough. It can sometimes come across as criticism but, assuming you have made the right selection, the advice they are giving you should be interpreted constructively. Lastly, do what you love. I think that is a great medium to make life and business enjoyable. Robin and I are both fortunate enough that we love what we do and enjoy the people that we do it with.

Every day is pleasurable and it’s easy to get up the next day with renewed enthusiasm and energy. IBR

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Janika Sprunger and Palloubet d’Halong in Aachen, Germany

High-Flying Horses: The Sport and the Business of Equestrianism

BY RACHEL FLESZAR W’15

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n the mid 2000s, a sensation emerged in equestrian sport: a black, Dutch-bred dressage stallion with such poise and elegance that he was capable of exceptional quality unlike any the dressage world had ever seen. Setting records and dominating international competition, this horse—named Totilas—has been called the horse of the century and was ultimately sold for an eight-figure sum.

Born in 2000, Totilas began competing as a young horse in Germany, at which point it became clear he was immensely talented. It was during this time that he was purchased by Moorland BV, a Dutch investment company. His name was changed to Moorland Totilas, and this firm tapped professional Dutch rider Edward Gal to ride and compete the horse. In 2008, Gal and Totilas began competing internationally, and, in 2009, emerged as breakthrough stars in modern dressage by besting the world record score in Grand Prix, the highest level of competition. The record had previously been held by three-time individual Olympic champion Anky van Grunsven. Throughout 2009, the pair continued to excel on the international circuit, winning team and individual gold medals at the European

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Championships and even improving upon their record-setting score. Gal and Totilas continued to dominate at the 2010 World Equestrian Games, where they became the first horse-rider partnership ever to sweep all three available dressage medals, one team and two individual.

Moorland BV’s investment was beginning to realize substantial returns. Sport horse breeding is highly regulated and each stallion must be approved individually to ensure that the quality of the breed is maintained. It is a vibrant industry in the Netherlands, Germany and Belgium, which export many of their top horses to other European nations as well as the United States. In Germany for example, 30,000 to 40,000 sport horses are bred annually, and buyers are will to pay a premium for young horses with the pedigree of a champion. At foal auctions today, it is not uncommon to see a three-month-old horse with impeccable breeding sold for upwards of €20,000. If one were to rank the top ten sport horse breeds based on money earned in dressage and show jumping competition, the Dutch Warmblood would emerge at the top of the list, although three breeds from Germany and Belgium each would also be major contend-

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ers. The other three rounding out the top ten are from France, Ireland and Sweden, respectively.

Totilas was approved for breeding in the Netherlands in 2009, and within a year had generated nearly €1.4 million, or $2 million, in revenues for his owners. The horse’s value had also greatly appreciated as a result of his unprecedented competitive success. It was after the 2010 World Equestrian Games that offers came flooding in for the then ten-year-old horse.

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dismay of many Dutch riders, who were concerned Germany would spoil their winning streak). The sale price was never publicly disclosed, although estimates put it in the range of €9.5 million to €15 million, or at current exchange rates, $13 million to $21 million.

It was only recently that another horse transacted for a price comparable to that of Totilas. A show jumper, Palloubet d’Halong, was sold in October 2013 for a reported €11 million, or

HIGH-LEVEL DRESSAGE AND SHOW JUMPING IS AN INTERSECTION BETWEEN BUSINESS AND SPORT.

”

Horses may only begin to compete internationally once they are eight years old by International Equestrian Federation regulations, although the prime of their competitive careers is generally considered to be between the ages of ten and fourteen. Totilas was ultimately sold to well-known German horse breeder and former Olympic show jumper Paul Schockemöhle (much to the

roughly $14.9 million. Palloubet is an immensely talented and acrobatic horse that has performed with remarkable consistency in some of the most challenging international venues. Sold as a ten-year-old, Palloubet first began competing internationally when he was eight. His competitive successes do not rival those of Totilas, in part because to date he has been competed by a young and fairly inexperienced rider. Thus, his new owners are paying primarily for his potential. What makes this exorbitant sale price even more unusual is that Palloubet is a gelding. One serious injury can render this horse all but worthless, whereas Totilas, once retired, can continue to generate income from breeding.

High-level dressage and show jumping is an intersection between business and sport. The standard business model is as follows: an owner, generally a high net worth individual (e.g. the much-maligned Ann Romney and her dressage horse Rafalca, whom she backed in the 2012 Olympics) or a company like Moorland BV, will seek to identify and purchase a promising young horse and commission a professional rider to train it and establish its competitive record, with the hope of selling it at a substantial multiple to the purchase price.

Totilas and Paloubet are exceptional outliers, although it is not uncommon for competition horses to be sold for prices in the range of six or even seven figures, which begs the question: who is buying these trophy horses? Young horses are often sold from one professional rider to another, in what is analogous to a B2B transaction, but the final “consumer” here is the high-income horse enthusiast who is willing to pay a premium for a talented and well-trained mount—and by extension, good competitive results. As a result, the sport takes on a strong connotation of exclusivity and privilege. Regular competitors may also have the opportunity to rub shoulders with celebrities or industry moguls: a list of junior riders at the top of the high school and college-age standings would include children of rock stars, hedge fund managers and tech moguls. Indeed, many of the top horse shows are extravagant affairs with an overtone of bourgeoisie. Riding and competing horses is undeniably a thrill—even for the casual equestrian—and at the pinnacle of the sport it is also unquestionably a luxury. IBR

Edward Gal and Totilas in Aachen, Germany AUTUMN/WINTER 2013

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Luxury Fast Fashion, As Defined by Uniqlo

Uniqlo store in Tokyo, Japan

BY ALICIA CHON W’16

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ociety has become blasé. Stores are littered with mass-produced attire. While many retailers, each delivering similarly low-quality fringed garments, are ground down by mundane trends, customers have settled for these options. Enter Uniqlo, the Japanese retail juggernaut that is displacing fast fashion with a redefinition of high luxury.

The genius of Uniqlo lies with founder and current CEO, Tadashi Yanai, who is currently the wealthiest man in Japan. He set an ambitious goal of $50 billion in 2020 sales, and his strategy involves aggressive exporting of garments that are produced and designed in Japan to recreate typical American basics and catered to consumers of every age and gender. Looking into the business model, one can see that Yanai’s strategy, ambitious as it may be, works.

Since Uniqlo first entered the American market with its SoHo, New York store in November 2006, it has monopolized fashion news headlines, and rightly so. In August 2013, Uniqlo Japan outlet sales rose 29% since October 2009 as humid temperatures drove up demand for lightweight clothing. In the last three years, the Yamaguchi-based retailer also renovated its Fifth Avenue and SoHo stores with signature rainbow LED-lit stairs leading up to a three-story maze of a store. In the last year, Uniqlo opened ten new stores. Yanai, who seeks to quadruple Uniqlo’s current revenue, is seemingly en route to doing so.

The question, then, lies in the success of Uniqlo’s trajectory, which continues to point upwards: How did this Japanese retailer permeate the American retail industry and become the fourth-largest fashion chain (behind H&M, Zara and Forever 21)? The multifaceted response lies in part in Uniqlo’s etymology.

With a name that’s short for “unique clothing”, Uniqlo delivers basic garments for a low price and high quality, and with a generous prism of color options.

Many admonish ‘cheap’ fashion, such as the Science and Technology Committee in England’s House of Lords, which deemed fast fashion as “costly and socially unacceptable.” Through dif-

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ferentiation and deliberate targeting of a narrow market, luxury goods appear to render affordable retailers subordinate. Take a simple white t-shirt, for example. A classic tee at Uniqlo sells for approximately $20. Its quality is superior to that of its immediate competitors, and its price is affordable. In fact, a keen eye is required to discern differences between a shirt from Uniqlo and a $120 top from Alexander Wang. In this way, Yanai, through his low-cost (but smartly engineered) products, has conflated luxury with affordability.

In September 2008, the Vancouver Sun released an article addressing the necessity of investing in one’s wardrobe and accusing the fast fashion industry of two major hemorrhages. The first compares two articles of clothing at separate price points: a $20 top worn once with a $20 cost per wear, and a $500 jacket worn once a week for a year with a $10 cost per wear. The anonymous writer argues that the $500 jacket offers a better value, due to its durability and higher return. Secondly, an investment in such a jacket avoids allows its wearer to differentiate himself from the crowd.

Uniqlo, in its simple business model, has derailed both arguments. First, Uniqlo’s purposefully streamlined offerings are basics, from oxford shirts and khaki pants to crew neck t-shirts and various washes of jeans. A customer shopping at Uniqlo seldom purchases a t-shirt with the mindset of wearing the top once.

The $20 top worn once a week for a year reduces its cost-perwear to $0.38, a bargain for any customer. While the pieces are inexpensive in comparison to those sold by Prada, Uniqlo does not succumb to trends. In fact, since its establishment, the only additions made to products were elemental tweaks in design and additions of color options to the existing rainbow-scheme. Uniqlo remained allegiant to its reputation as a basics retailer, meaning one would need to look hard to locate cropped tops and studded shorts at a Uniqlo store.

Uniqlo’s success is also attributed to its embodiment of the Japanese aesthetic. To this date, Japanese companies place an em-

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phasis on quality over quantity. The philosophy of Japanese home goods store Muji, for example, is to highlight each piece’s natural colors and shapes through simplicity in design. This minimalistic approach can also be traced back to Japanese fashion designers like Rei Kawakubo of Comme des Garçons, Yohji Yamamoto and Issey Miyake. The oeuvres of Yamamoto are especially globally venerated, with each new collection rallying a new coterie of followers. His design approach is unique: Seldom does Yamamoto use a color other than black, because according to him, the lack of intruding shades allows people to hone in on the design. Such is the epitome of Japanese aesthetic: focus on quality and design and transition away from frivolity.

The unique integration of Japanese aesthetic has not gone unnoticed, even on a local level. In the spring of 2013, Kenji Tulman (W ’14) applied for a retail intern position at Uniqlo in Tokyo. A dual citizen of the United States and Japan, Tulman recognized the advantages of observing a company that embodies the Japanese culture throughout its entire company. “From the minimalist logo to employee training programs, Uniqlo has worked to implement the traditional approach,” Tulman said.

“Uniqlo has succeeded in filling a niche spot within the apparel world.”

That niche differentiation is linked to Uniqlo’s value of design. By emphasizing the quality craftsmanship synonymous with Japanese culture, Yanai created a specialized business model and permeated the luxury goods industry with a fast-fashion chain.

The production department, for example, employs 300 staff and takumi¸ or expert textile artisans. Dyer Takumi Kazuaki Iida explained to Japanese retail holding company Fast Retailing that while his occupation involves communication with suppliers and manufacturers in Shanghai and Jakarta, the aim remains the same: “To make truly good products.” Iida said, “I am proud to be passing on expert techniques to the next generation of Chinese technicians.”

Heattech, one of the company’s greatly marketed products, is another facet of Uniqlo’s success. Defined as “heat-generating clothing”, Heattech clothing absorbs body moisture to allow the wearer to maintain his body temperature. The selling point lies in the specially designed hollow fibers that make up the garments’ fabric. Containing natural amino acids derived from milk protein for a smooth texture, these fibers “Capture air to prevent warmth from escaping your body.” From leggings and socks to shirts and gloves, the line has emerged internationally as a winter staple. Thereby, Heattech has essentially differentiated Uniqlo as an industry leader rather than a follower.

Uniqlo’s partnerships with top-tier designers for streamlined collaborations have dissolved disparities in quality. The appeal for customers lies in the economical pricing. In the case of the J+ collection, a partnership with designer Jil Sander, Uniqlo delivered wool flannel for men ($79-$149) and silhouetted puffer coats ($99) in symphonies of grays and neutrals. These items can be compared to the steep $3190 price tag of Jil Sander’s current Needle Punched Stripe Wool Blend Coat.

The demand for such garments is high.

According to New York Times’ T Magazine, on the morning of the J+ collection launch, “At 9 a.m., the line outside Uniqlo in SoHo was already stretching toward Dean & Deluca. By 10, it was around the block. Stores in London and Paris had already sold out.”

Uniqlo disseminated the archetypal definition of ‘luxury’ through such partnerships. The success of J+ spawned a surge of collaborations, such as those with lauded designer Jun Takahashi, SUNO, Theysken’s Theory and Daphne Guiness. Each low-cost piece, unlike former attempts to bring quality to the masses, delivered a subtly pared-down message, synching the signature aesthetics of each designer with the minimalistic manifesto of Uniqlo.

Today, Uniqlo continues to deliver, with the scheduled opening of a physical store in Philadelphia at 1608 Chestnut Street in 2014. The company exhibited its largest sales gain in almost four years, and it doesn’t seem to be slowing down: Uniqlo has overcome fast-fashion stereotypes with its own luxury niche. IBR

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Faculty Interview: Professor Barbara Kahn

BY DAVID HIRSCHY W’16

Major events have threatened the foundations of luxury retail over the last decade, not the least from the onslaught of Digitalization and the Great Recession. To discuss these subjects in more detail, IBR sat down with Wharton marketing Professor Barbara Kahn, Director of Jay H. Baker Retailing Center. As former Dean at the University of Miami and former Vice Dean and Director of the Wharton Undergraduate Program, Professor Kahn’s relevant research ranges from brand loyalty to retail assortment.

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nternational Business Review: You have conducted extensive research on global brand management. How is luxury brand management different from brand management for mass goods?

Barbara Kahn: Luxury is a really interesting area because, by definition, luxury means ‘premium’, and obviously the size of that market is smaller. The volume is at the lower end of the market. Think of the market like a triangle: smaller volume and higher prices at the top, and bigger volume and lower prices at the bottom. But if you increase market share and get the masses to buy luxury, that can ironically diminish the value of the luxury business. It’s a paradox: sell too much and you lose the value of your brand. There is an elitism that is necessary for luxury. Basically, you need strategies to manage the “brand” and other strategies to manage the “business.”

Because luxury brands have to maintain their high-end status, you have to be creative in managing the business. There are several different models that can maintain the price premium at the high end, while increasing market share, or increasing volume, at the lower ends.

IBR: During a recession, do luxury brands adapt or do they weather the storm? What strategies appear to be most effective for them?

BK: The recession hit in 2008, and Christmas 2008 was when many luxury brands were in trouble because they hadn’t anticipated the change in business appropriately and were stuck with excess inventory. I was in Miami at the time, which is a hub for many luxury brands. What’s interesting about the recession from a luxury market point-of-view is that it disproportionately affects the less

wealthy people. Not all, of course, but many of the super wealthy people were still super wealthy (even during the recession) and they are the ones who traditionally buy luxury brands. However, in 2008, in addition to the real losses that obviously did occur for some, there was also social and psychological pressure for wealthy people (who could have afforded to shop) to not buy luxury goods.

Many thought it was unsympathetic or just plain tacky to go shopping while so many people were out of jobs or were suffering from underwater mortgages in Miami (the housing crisis hit hard in Miami). If you ventured into the luxury malls in Miami in 2008, they were dead empty. That holiday season, given that excess inventory that now existed, marketers began to offer deep discounts on some of the luxury brands, which obviously could damage the brand in the long-run. I think that was a mistake for the luxury brands, I think some of them panicked and discounted too quickly and too deeply. In 2009 and 2010, some of the higher-end shoppers eventually started going back to the malls. Luxury brands and luxury retailers began to do better; they recovered more quickly than mainstream retailers. Some of the success was due to higher sales in China, but some of it was a function of the wealthy buying again.

Some of it was much better inventory control and forecasting, so the high-end retailers did not have to rely on deep discounts again.

In fact, in some cases there was some perceived “scarcity” going on as inventories were leaner. The luxury brands and retailers recognized that the big discounts in 2008 were not helpful to the brand prestige and generally did not resort to that strategy again.

There was also success at the lower end of the market for retailers who were catering to people who had suffered through the recession. Dollar General and Family Dollar did well during these times.

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IBR: To what extent can the demand for luxury goods be explained quantitatively rather than psychologically or qualitatively?

BK: We know that people often can’t objectively judge quality.

There are some expert consumers who know fashion, who can look at the garment and can see the kind of material, the stitching and the design. On the other hand, other people definitely use price to infer quality. However, we have a lot of evidence across many product classes that shows that it is not the highly positively correlated relationship between price and quality that people think it is. Even though, therefore, price is not necessarily an accurate indicator of quality, people continue to use price as a cue. Under those circumstances, if you cut the price (which is what I’m saying happened during the Great Recession) you can lower the belief in perceived quality. On the other, higher price can increase demand on these high-end luxury goods. This is the opposite from general economic theory where the prediction is that an increase in price

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IT’S NOT REALLY ‘ONLINE’ OR E-COMMERCE ANYMORE; IT’S JUST ‘COMMERCE.’ RETAIL HAS MORPHED INTO MULTIPLATFORM COMMERCE.

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would decrease demand. In luxury, lowering price or discounting price, can paradoxically decrease demand because of the change in the perceived value of the luxury good.

IBR: As a follow-up, if their price point is driven off this high price, how do they go about determining the ultimate price? Is there a limit or a line that they shouldn’t cross?

BK: One of the things to think about is how you can charge a high price and still achieve high volume. This goes back to the idea I mentioned before about having to manage both the “brand” and the “business.” There are a lot of different ways to do this. On one extreme, you have Ralph Lauren, which is the prime example of having something across the whole spectrum. They have high-end runway, but they make most of their money down in the outlets or at the lower end. So how can they do that? They have the Ralph logo on all the outlet items and all the way up. However, customers still discriminate. Luxury customers can still discriminate between the high-end and the outlets, and are willing to pay the higher price for the high end. The Ralph Lauren mansion in New York located on the Upper East Side is a beautiful example of the high end of the Ralph Lauren line. In the mansion, they stock expensive runway items, and it’s a gorgeous store. That kind of merchandising establishes the credibility of the Ralph Lauren brand, and that credibility motivates purchasing at the other extreme where you have the 32

outlet and factory stores. Ralph Lauren manages the business across that whole spectrum, which is really tricky. Ralph Lauren also has a very broad line that goes across women, men, children and home— the entire lifestyle—and they manage all of those price points.

Ralph Lauren does it very well. A different model is followed by the European luxury brands like LVMH, Chanel, and Hermes. You don’t tend to see them in outlets. Hermes, in particular uses a scarcity model: You have to apply and be accepted to get a Birken bag.

That model carries huge premiums. These European luxury brands tend to follow the “house of brands” strategy, unlike the “branded house” strategy that Ralph Lauren follows. Kering owns Gucci but also Puma, so they don’t tend to put two different price points under one brand name. Coach follows another strategy. They sell the same product in their outlets as they do in their primary stores, but they try to put a switching cost there. First of all, the item is out of season, and second, the Coach outlets are typically far from the cities, requiring a travel cost. You have to drive a long way to get to the store, so that’s a barrier to buying it at a low price.

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IBR: Given the changes to luxury branding from the Digital Era, what do you think luxury retail will look like 50 years from now?

BK: Without question, people will buy luxury online. I remember twenty years ago when online shopping first started happening. I asked my students at the time, “Do you think anybody will buy online?” They said “No, no,” so obviously they did not see the future very well. Now, buying online is routine, and some wonder whether people will buy luxury online. Some say that luxury consumers will only buy in store, but that is clearly wrong. We are starting to see websites that are devoted exclusively to luxury. There’s no question that luxury can go online, too. However, I also don’t think though that bricks and mortar will end. Some forecasters predicted the end of movie theatres when the digital format emerged, but people still go to the movies. There is something about a physical, social experience of going to a store, trying things on, and there are the conveniences of going to a physical store. A lot of people want to talk to an expert in a store. There’s still value a physical store can add. It’s not really “online” or e-commerce anymore; it’s just “commerce.” Retail has morphed into multi-platform commerce.

The consumer is channel-agnostic; it’s just an “omni-channel” kind of experience. The mobile phone is the important connector. Right now, the online business is pretty small, probably under 20%, and the physical business is still way bigger. But the trend is definitely

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The Ralph Lauren mansion in New York located on the Upper East Side

moving to more online.

IBR: The Baker Director’s Council consists of individuals who are involved in entrepreneurial ventures in the retail sphere. What are your thoughts on established luxury brands versus startup luxury companies, such as Rent the Runway and Gilt?

BK: At Baker, we have the Director’s Council and we have our Advisory Board, which is comprised of the major players in traditional retail. There are many differences between the two groups.

The people on the director’s council are people who started a new enterprise. They are generally younger and come from a different culture; the newly-built businesses are more open. They share data.

Maybe they’ll change over time, but right now they’re much more open. They talk to each other whereas the traditional retail businesses are more closed. Everything’s more confidential in established businesses, and they don’t like to share information. In the end, though, there are a lot of commonalities between traditional retail and the new online start-ups. They all have to understand inventory control and how to run a business. For both, it’s retail and

selling products and services. You have to manage inventory. You have to manage delivery. You have to manage operations. You’re seeing the physical stores developing strong online presences, and you’re seeing the pure online start-ups starting to consider offline presence.

IBR: Would you call this increased access a democratization of luxury goods? How would you categorize that new movement?

BK: Access is easier, like what Moda Operandi did—where you could buy off the runway much more easily than in the past. Zara and H&M also accelerated the idea of “fast fashion.” They reduced the time from runway to ready-to-wear. Some of the online elements make it easier for anybody to access fashion. If you lived in some rural town in the middle of the US, you couldn’t see what’s going on in New York fashion shows that easily in the past, but now you can. The fashion shows are online, so to that degree there has been democratization, as there is more general access. But, of course, luxury is still expensive.

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SOME SAY THAT LUXURY CONSUMERS WILL ONLY BUY IN STORE, BUT THAT IS CLEARLY WRONG. WE ARE STARTING TO SEE WEBSITES THAT ARE DEVOTED EXCLUSIVELY TO LUXURY. IBR: You talked about the Baker Retail Industry Advisory Board.

What factors are included in the selection process for candidates for the Baker Industry Advisory Board?

BK: Jay Baker, the past president at Kohl’s, established the initial advisory board when he endowed the Center. He is still very active and is the current chairman of our board. He is very much involved in the center and influences the composition of the board. The board initially was comprised of mostly apparel and clothing-centric mall department stores. However, we define retail broadly, so we recently added eBay and some of the online retailers. We also recently added more specialty retailing such as Under Armour, Tory Burch and Alice and Olivia.

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IBR: To what extent do these individuals interact with one another?

Do you host events or meetings?

BK: We have two board meetings a year: one at Wharton in Philadelphia and one in New York. We’re having a 10th anniversary gala of the center on campus. We also do a lot of impact conferences where we have academics and industry members interact and discuss new retailing ideas. We recently had an impact conference on customer emotion and the customer experience, which was held one day in Philadelphia on campus and one day in New York visiting stores and showrooms. The year before, we did an impact conference on multi-channel distribution. We have sponsored roundtables on social media and Facebook and how those forces interact with retail. Our goal is to bring together industry members, academics and students. We also encourage students to think about retailing as a career.

The number of students who have taken jobs in retail from Penn and Wharton has increased tremendously since Baker was established.

IBR: Regarding students entering careers in retail, have you seen any trends, even within certain segments of retail?

BK: Luxury is popular, but we’ve seen people going into all different aspects of retail. I’ve only been with the center a couple of years, but the Baker Center has increased interest in retail in two ways over the last ten years.

First, they’ve raised awareness. By bringing industry members to speak on campus and incorporating more retail information into the curriculum, students are noticing how exciting retail can be. Retail is also more exciting as the paradigm is shifting, so there’s just more genuine enthusiasm and excitement. Secondly, Baker has worked with admissions to bring in students with retail experience to Wharton. If you’re interested in retail before you apply for an MBA or you have a couple years of experience in retail, we want Wharton to be a place you consider. We have a strong retail program that can leverage that experience, help you grow and develop new skills. We encourage students who are interested in retail to come

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Neil Blumenthal at a Baker Retail Center event

to Wharton, and then we try to nurture them while they’re here.

We’re also working on alumni programs so that we have a network of people who are interested in retail. We do alumni events, like an alumni breakfast, in New York twice a year. The President from LVMH China, the CEO of the Home Shopping Network, and the CEO of Bloomingdales have all come to speak at our breakfasts.

IBR: As Director of the Baker Retail Center, how would you outline your typical day?

BK: I have no typical day. I’m really involved in the board and the events, so I’ll spend a lot of time on those. I’m also a full-time faculty member, so I’m teaching and doing research as well. Since I’ve been back, my research has moved mostly over to retail. I also do more speaking events around retail now, so it’s hard to say what a typical day is. There’s no such thing. At the heart of everything I do is generating knowledge, interacting with students and interacting with industry.

IBR: What research are you currently working on?

BK: Right now I’m doing research on perceived variety and variety of the assortment. Paradox of choice is something people talk about: Are too many choices a negative thing? I don’t believe so. I think a lot of choice is great! However, you have to figure out a way to manage the choice so that people appreciate it. I’m interested in different ways that people perceive assortments so that we know if they can appreciate the variety. We just acquired new eye-tracking equipment and facial- and motion-tracking equipment, and we’re

looking at how changes in the way the assortment is depicted or arranged and how packaging can affect what people pay attention to and how they emotionally respond to it. I’ve also been researching how changes in product shape can affect perceived quantity. I’ve found that if things are complete or whole, people think they’re bigger than say if an object is “half-sized” even if the actual quantity is bigger in the half-size. I have also done research on how people estimate and perceive risk particularly in the healthcare arena. it’s hard enough for students to understand probabilities, so you can imagine how hard it is for a person on the street who’s not used to thinking about risk to deal with the vast information that is required to make decisions about choosing a hospital, dealing with treatment options, preventative testing, etc. I’m interested in how do we get that information out and make it understandable, and help patients cope with the sometimes-stressful conditions associated with health-decision making.

IBR: What advice would you offer to Wharton undergraduates who are interested in pursuing a career in luxury retail?

BK: First off, it’s a great time to do it. I would say definitely get involved with Baker. Come to our events. That’s what we’re trying to do: get people involved. In retail, the industry looks for experience, so doing internships and shadowing helps. Second, take the right courses: marketing and retail courses are important, but operations and management are also important. Accounting is always important. Finally, there are also a lot of co-curricular opportunities. Soak up all the information while you’re here. IBR

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Finding a Place for Haute Couture

BY SUE JIA W’17

in an industry where costs are high and demand is low. The continuous maintenance of these monetary black holes shows that the fashion houses expect more from haute couture than the profit from selling dresses made from miles of gold thread.

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t the 2013 Academy Awards, Jennifer Lawrence’s dress snatched the media’s eye with its subtly glamorous and daring vibe. Viewers raved over the actress’ ensemble for weeks afterwards, arguing over the new feathering trends of Hollywood’s most dazzling elite. Lawrence’s dress was only one of several centerpieces by fashion powerhouse Dior, which once again captured the world’s attention on the red carpet catwalk.

The lure of the too-bizarre-to-wear is both the hallmark and the spotlight of the zenith of fashion.

Haute Couture—which literally translates to “high sewing”—is the purest form of the fashion industry, viewed as a form of wearable art at an exorbitant cost. Only works from one of the 11 houses approved by the Chambre Syndicale de la Haute Couture can qualify to be officially categorized under this term. Each house must make each of their minimum 75 garments by hand and employ at least twenty people for the custom-tailored pieces. “Pieces” is a more accurate term than “clothes” to describe these garments as, like masterpieces of art, few can afford them and fewer still can put them to practical use. Indeed, it is almost a wonder that couture has survived 36

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Business Woes There is no doubt that today’s audiences for couture are not the same as the ones from France’s Belle Epoque in the late 19th century, where it originated. There is an increasing shift to everyday wear from a working population that wants garments that belong in a wardrobe as opposed to an atelier. The proliferation of high-end daily wear is especially attractive, as consumers can now envelope themselves in a sense of luxury without sacrificing practicality. This shift has greatly diminished the customer base for the couture houses, and combined with economic difficulties, has led to the shut-down of half of the registered houses within the last twenty years.

The tsunami trend of ready-to-wear clothing is not the only reason for the wash-off of couture profit. The industry is fundamentally built for losses with a miniscule customer base and very high cost. The five-figure price tags on the ensembles do not nearly compensate for the cost of shows and mile-length gold threads. Designer Jean-Paul Gaultier admits that they “don’t make any money out of it,” while Jean-Jacques Picart, co-founder of Christian Lacroix, seconds that “you can’t make a profit from couture.”

But if couture is doomed for loss, why do companies still sustain it? In difficult financial times, why have the sales of two members of the couture Big Four, Chanel and Christian Dior, actually increased?

“Everyday Couture” Haute couture may not attract any profit through direct sales, but indirectly, its brands’ names are magnetic. “Haute

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couture” conjures an image of fantasy that appeals to many consumers. The label is an effective marketing tool in promoting the sense of luxury for the company’s other products.

Affordable pieces such as scarves and perfumes, when branded with the couture label of the company, instantly gain the fantastical and luxurious image of high fashion, thus becoming much more desirable for consumers.

To the typical middle-class customer, a bottle of Dior perfume is an affordable way to experience a portion of the desirable luxury of a red carpet dress. Julie El Ghouzzi, director of the Centre de Luxe et de la Création, believes that haute couture houses must function within a product pyramid, with couture at the top, followed by high-end daily wear and subsequently accessories and perfumes. El Ghouzzi suggests that investments made for the top product, haute couture, add qualitative value to the company while quantitative returns are generally achieved by retailing the low-cost products.

Niche marketing is another strategy that employs the couture feel, though through a more indirect method. Azzedine Alaia, a couture house known most famously for its dresses, is such an example. The firm operates on $63 million a year, paling in comparison to the hundreds of millions earned by other brands. However, Alaia attracts many customers in its meticulous promotion of a very specific product line. The exclusiveness of certain

Jennifer Lawrence at the 2013 Academy Awards

Joseph C. Nunes, Xavier Drèze, Young Jee Han, Conspicuous consumption in a recession: Toning it down or turning it up?, Journal of Consumer Psychology, Volume 21, Issue 2, April 2011, Pages 199-205, ISSN 1057-7408

retail brands is another effective marketing bonus, as many buyers believe the selectiveness of these retailers to be an indication of the focus on quality and status of the product.

The increase in sales of couture brands during economic downturn can also be explained by the lure of the haute couture

name. As always, luxury goods imply a sense of social status. Although common wisdom says that conspicuous consumption is toned down during economic recession, evidence indicates that there is still an undertone of this trend during hard times. A study from UCLA’s Marshall School of Business indicates that Louis Vuitton and Gucci actually raised their prices during the recent recession. In fact, the product line during the recession for Louis Vuitton had a price 31% higher than that of the previous line. Furthermore, both Louis Vuitton and Gucci marketed logo-prominent products at lower prices from 2008 to 2009.

The combination of price increase and brand prominence thus suggests the existence of a market catering to conspicuous consumption. The extravagant couture labels may have contributed to increased sales during the new conspicuous consumption trend amidst the global recession.

International Retail Value In addition to its value as being the transformative fairy godmother for mass-market products, haute couture is being considered as a means for raking in revenues as it moves overseas.

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DLF Emporio luxury mall in New Delhi, India

In the last few years, there has been a shift toward international markets, especially East Asia and the Middle East, where there is an increasing appetite for luxury brands. With the global movement of consumers, the couture industries are moving out of traditional Parisian, Milanese and New York markets. East Asian designers such as Issey Miyake and Middle Eastern designers such as Elie Saab have made haute couture more accessible to global consumers. The inclusion of draped jodhpur-like pants and robe-inspired dresses in recent couture pieces are tailored to appeal to an international base and aesthetic.

The trend has extended to affluent Middle Eastern women,

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who purchase up to twenty or thirty couture dresses each season, ranging in price from US$3,000 to $75,000. Qatar is one example of a nation with an emerging appetite for couture, with a strong GDP growth and an inclination toward conspicuous consumption: In July 2012, a Qatar private investor group, Mayhoola for Investments S.P.C., entered a contract to acquire the stake capital of Valentino Fashion Group.

Even in Europe and North America, traditional markets for haute couture, there seems to be a re-emerging demand for couture that hints at a shift in the retail revenue of the industry. Designers are reporting that more and more consumers

ALTHOUGH COMMON WISDOM SAYS THAT CONSPICUOUS CONSUMPTION IS TONED DOWN DURING ECONOMIC RECESSION, EVIDENCE INDICATES THAT THERE IS STILL AN UNDERTONE OF THIS TREND DURING HARD TIMES.

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are young working women who buy pieces of couture to add a unique flair to their wardrobes. There is the suggestion that the global recession has made people re-evaluate their values of fashion, and that there is now an increasing retail market for couture as consumers prioritize fashion over cost. Although this may be true for some, the emergence of a retail market for couture is still mostly dependent on international expansion that is deeply rooted in the appeal of the uniqueness of custom-made clothing.

Do the Values of Couture Make It Sustainable?

Although haute couture is an important marketing tool, its function as a mass marketing tool has actually cost some of its products’ appeal. Research has shown that mass marketing of affordable products from luxury lines actually decreases sales, as the implication of a higher social status is no longer upheld.

Furthermore, marketing using couture names has gained a negative label in the last few years with the emergence of “logo shopping” in China. The indiscriminate shopping frenzy for luxury brand names has caused some companies to consider re-scaling operations in order to re-brand their reputation to prevent a loss in value of the couture name.

Furthermore, although international markets show a growing demand for couture, the demand in the Western markets is still heavily weighted towards the ready-to-wear lines. The number of consumers willing or able to buy select couture pieces remains very low. This begs the question as to whether the Western markets are past the blatant extravagance of the couture phase; if the answer is yes, does couture hold any future financial value as a segment of the fashion industry?

Value of Haute Couture There is no denying that haute couture’s business value lies in its ability to market the luxurious brand image of the fashion powerhouses. Recent trends suggest an additional retail value in international markets with an appetite for ostentatious luxury that traditional markets seemed to have abandoned. The question of the future value of couture is a serious one that could force the fashion industry to completely restructure and shift strategies. It remains to be revealed if haute couture will continue to be an invaluable aspect of the fashion business, or if its inherently backward cost and revenue system will render it valueless in a shifting world. IBR

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The Rise of Experiential Luxury

BY LILI PENG W’15

Burberry Live Taipei, Burberry’s 4D Experience when launching their Autumn 2012 Line

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mong the world’s affluent, a growing desire to experience rather than to just have is catalyzing change in the luxury industry. A 2012 BCG report, “Luxe Redux: Raising the Bar for Selling of Luxuries”, highlighted this shift in customer preference from owning luxury to experiencing luxury. BCG’s luxury, fashion, and beauty practice deems this subsector of experiential luxury to be growing by 12% per year while the market for luxury goods grows by 3 to 7%. Experiential luxury includes spa services, safaris, luxury travel, fine dining, special art auctions and other services. The BCG report finds that growth in experiential luxury is 50% faster than growth in the sale of luxury goods: Sales in the global luxury sector amounted to $660 billion in goods and another $770 billion in services.

The shift in experiential luxury is growing very quickly, and luxury brands may fall behind if they cannot adapt. For now, a lack of experiential elements to luxury companies’ product offerings may not yet be hitting the bottom line, but it certainly is a missed opportunity for them to enhance financial performance and snag a space in a competitive market that is not yet flooded with competition.

Multi-dimensional drivers are pushing this movement from branded luxury to experiential luxury forward. In their 2012 report, BCG makes a compelling four-factor case for this paradigm shift from owning luxury to experiencing luxury. Research indicates 40

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four overarching trends that are driving the move towards experiential luxury: aging demographics, Generation Y’s consumer preferences, changes in consumption patterns and a psychological quest for lasting satisfaction.

First and foremost, the changing demographics of the luxury shopper are accelerating the rise in experiential luxury. Luxury consumers in developed countries – the United States, Europe and Japan – who first drove the luxury market boom in the 1990s are reaching their upper middle ages and beginning to retire. As this key consumer segment grows older, its members desire different aspects of luxury. As they reach retirement, they reach a point in life when the value added by owning new things diminishes significantly relative to the value of enjoying new experiences. As people get older, they become less interested in having the newest Omega watch, Louis Vuitton bag or Burberry coat, and would rather engage in valuable experiences. The primary consumers who spurred the growth in luxury goods a few decades ago now want to consume a different facet of luxury, one that they believe will provide them with longer-lasting value and higher utility.

In a similar vein to aging demographics, those considered to be a part of Generation Y—adults in their late teens and twenties—are increasingly interested in defining themselves through not only what they buy, but through what they do. Generation Y’s hyper-connected lifestyles that are constantly being shared, uploaded

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and blogged about emphasize instant gratification and luxurious experiences. Affluent members of Generation Y are no longer only satisfied with buying a Cartier watch, but by helicopter skiing in the Alps or a shopping spree in Milan. American Express Canada reports that younger Canadians spend more on luxury travel and fashion than any other demographic. American Express’ Generation Y cardholders had an “89% increase in luxury travel spending” in 2012 compared to 2011.

Furthermore, consumption patterns are changing as the tastes of middle-class consumers in rapidly developing markets like China and Brazil mature. Emerging markets’ newly rich and middle-class are the most voracious and rapidly growing consumer segments in luxury. Just like the Japanese in the 1990s, wealthy shoppers in the strongest emerging markets are buying into luxury brands with enthusiasm. Interestingly, when customers in this segment first buy into luxury, they are drawn to durable goods with reputable brands.

However, as their tastes mature, they tend to transition from accumulating material luxury to purchasing luxury experiences, a trend that’s reflected in the growth rates for experiential luxury spending.

Lastly, consumer reports indicate that consumers are seeking to

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Dom Perignon, Marc Jacobs, Louis Vuitton and Fendi – is currently building up its Cheval Blanc hotel franchise. As of now, there’s a Cheval Blanc in Courchevel, a French ski report, and in the Maldives; LVMH plans to expand into Oman and Egypt. These beautiful hotels encapsulate a traditional luxury brand rising to meet the increased demand for experiential luxury To capitalize on the demand for experiential luxury, brands must also rethink and refine their marketing strategy. Luxury brands are seeking ways to augment their traditional image and show consumers that they can provide not only a quality product, but also a memorable experience. For example, Swiss watchmaker IWC is promoting Pilot’s watches in Hong Kong by giving customers a ride in a flight simulator with large screens and surround-sound. Brands need to use storytelling, not just static snapshots, to communicate the backstory behind the brand and how its services enhance consumers’ lives in a significant, meaningful way. As an example, Burberry started a large-scale event series in Taiwan delivering fashion through a mix of physical and digital channels intended to redefine the brand experience. On that note, it’s now necessary for luxury brands to build a digital presence, embrace technology and use it to

LUXURY BRANDS ARE SEEKING WAYS TO AUGMENT THEIR TRADITIONAL IMAGE AND SHOW CONSUMERS THAT THEY CAN PROVIDE NOT ONLY A QUALITY PRODUCT, BUT ALSO A MEMORABLE EXPERIENCE.

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move beyond accumulating material goods to obtain a deeper sense of purpose. Luxury experiences satisfy consumers’ wish to spend in ways that provide more personal meaning and have greater staying power. A study by Unity Marketing shows that US consumers are “more than three times as satisfied with their luxury experiences as they are with their purchases of personal luxury goods.” The same study reports an accelerating decline in consumers’ satisfaction with their purchase of luxury goods and a rise in their contentment with luxury experiences. For today’s luxury consumers, buying a new Hermes tie seems to provide them with less utility than jetting off to Paris and spending a few nights at the Four Seasons Hotel George V Paris, where a room can range from €990.00 to €4200.00 per night.

This paradigm shift towards experiential luxury spending has traditional brands scrambling to stay competitive. While some established luxury brands are cautiously trying out new services to cater to the changing luxury shopper, others are incorporating luxury experiences in every aspect of their current offerings. For example, BMW is transforming the often frustrating process of waiting for the delivery of a new car into a full experience: Buyers of BMW cars can now receive constant updates about the car’s assembly and its journey home from the factory. LVMH, the portfolio company that holds an impressive list of the most well known luxury brands –

offer the experience of luxury to its consumers. Technology widens the channels of communication and increases the number of points of contact for brands to interact with and engage their consumers.

Rather than just a fad that will burn out quickly, research suggests that this emphasis of experiential luxury is lasting. Macroeconomic indicators point towards the luxury services market as a new, significant space. The global rich, the largest consumers of traditional and experiential luxury, are growing in number and have historically been less sensitive to the fluctuations of the economy cycle. Even in a recession, the affluent consumers of experiential luxury are often able and wiling to dig into their savings to continue to spend. The number of millionaires is expected to rise in emerging and developed markets, and they will continue to embrace luxury offerings with enthusiasm. Additionally, today’s more prolific luxury customers are the newly affluent and middle class in the emerging markets. This segment’s obsession with luxury is a boon for the luxury sector, and barring a severe global downturn, will continue to spend on luxury products and, increasingly, on luxury services.

Of course, this certainly does not mean that traditional luxury goods are becoming obsolete. Rather, research and analysis points towards growing wallet share in experiential luxury that outpaces traditional luxury and is here to stay. IBR

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Table du Lancaster: Classic Elegance in Nouvelle Cuisine REVIEW BY KATIE HOLBROOK C’15

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Katie Holbrook, one of IBR’s veteran undergraduate contributors, chose to study abroad in Seville, Spain during the Fall 2013 semester. Our editors asked her to contribute a creative piece on a luxury culinary excursion during a weekend trip she took to Paris, France. The result was the following article, quite unlike any work ever published by the magazine.

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his weekend I took a break from weekdays filled with classes and coffee cups in southern Spain to travel to Paris. After a day’s worth of meals in the city, it couldn’t be clearer that I’d left behind Sevilla’s salt-and-olive-oil diet for different kind of richness: a creamy, indulgent palate that constantly delighted me with its freshness and wealth of textures. There was a lot to see in the city, including breathtaking architecture against romantic stormy skies, an Impressionist goldmine in the Musée D’Orsay, iconic arcs, bridges and towers galore. For a foodie like myself, though, the real treasure was the cuisine.

The crowning moment came on Saturday night with my plan to review La Table du Lancaster, Julien Roucheteau’s ultra-upscale restaurant housed in the 5-star Hotel Lancaster, in pursuit of the ultimate luxurious experience for the IBR. I’m the kind of girl who gets her toes wet before jumping into a pool, so as an unconventional aperitif, I whet my appetite for the evening ahead with a cup of the famous chocolat africain from Angelina Tearoom. Drinking this hot chocolate is pure melted bliss with just the right touch of bitterness. As I sipped it in the gardens across the

an atmosphere of understated elegance. This is not a see-and-be-seen establishment decorated to trick you into thinking you’re at Versailles; it’s a place to enjoy a private, immaculately-coordinated meal with flawless service. In this sense, Lancaster’s façade was in perfect harmony with its adherence to the nouvelle cuisine approach because of its rejection of excessive complication and emphasis on simple excellence. Regardless of the lack of flash, the caliber of the establishment was unmistakable from the second the door was opened, and each staff member greeted us with a soft “Bonsoir.”

The dining room is decorated in neutrals, predominantly gray and white, with a soft lighting scheme that favors wall fixtures instead of overhead lighting, save the crystal chandelier. Heavy velvet drapes frame a window that consumes one wall, looking onto a candlelit patio that was almost too inviting for the cold weather. A single fresh flower ornaments each uncluttered, impeccably-set table. The tranquil, timeless decor adds to the promise of a long, leisurely meal ahead. Even the menu conspires to make a diner forget about time, dispensing with the traditional organization into appetizers and main plates, and inviting

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NO FLAVOR WAS USED TO OVERPOWER OTHERS OR TRICK THE TASTE BUDS; THEY WORKED IN AN INTENSE HARMONY THAT MADE EACH DISH A COORDINATED DELIGHT RATHER THAN A STRUGGLE FOR THE PALATE’S ATTENTION.

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street, my mind drifted to the associations that drinking chocolate carried from its beginnings in Europe. Anyone who has taken Professor Lisa Mitchell’s course “East and West: a Hitchhiker’s Guide…” might remember that when chocolate was originally brought to southern Europe, it stood in sharp contrast the industrious mindset of coffee drinkers in northern Europe—a mindset I daresay many Penn students understand all too well. Chocolate, in comparison, was representative of a life of nobility and luxury. It was all too fitting, I reflected, to be sipping such a richness of associations as a prelude to a dinner that was sure to be the culmination of a weekend of decadence.

Hours later, my date and I exited the metro (a decent substitute for chartering a town car) only to be confronted by the brilliantly illuminated Arc de Triomphe, not to mention a tempting array of designer stores.

The hotel was situated on a quiet street just off the Champs Elysées, which turned out to set the tone very nicely for what would prove to be

diners to view the meal holistically. To this end, the menu has headings that group foods by points of origin. My favorite of these was a tie between “According to winds and tides,” and “From the edge of the wood to the pond…” (ellipses included). If the headings hadn’t caught your eye like they did mine, there was no need to pick, as the staff would arrange for a surprise menu.

For me, the best part of any dining experience is the planning stage: whittling down all the options and constructing the meal. To help draw out and enhance this part of the experience, the restaurant offered us a selection of three amuse-bouches to tide us over as we perused our menus. They came arranged in a line—a triangle, a circle and an upside-down comma—which was as delightful to behold as it was to taste.

The first part was a bite of squash pie with a yogurt topping which, surprisingly, had a flavor reminiscent of key lime pie; the second was a savory miniature donut with tomato in the center; the third, egg yolk

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and sausage mousses atop a morsel of flatbread, finished off with shreds of Granny Smith—the final effect of which was a pleasant blending of flavors, a bit smoky and a bit tart, but impossible to pick out just one element. These three morsels introduced the focus on fresh flavors and excellence in texture that would prove signature to Chef Roucheteau’s approach.

Menu closed and order in mind, I began to chat with my date about

wine. Leave it to me to be placated by food.

Just after we ordered, three grey-suited servers appeared, bearing more unsolicited dishes, to prepare our palates for the meal: artichoke mousse with hazelnut cream and hints of lemon that was so delicate and fluffy that I would have doubted it had ever entered my mouth at all if not for the slight crunch of hazelnuts on top and the glee it inspired in my taste buds. The mousse was served in a beautiful white porcelain

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EVEN THE MENU CONSPIRES TO MAKE A DINER FORGET ABOUT TIME, DISPENSING WITH THE TRADITIONAL ORGANIZATION INTO APPETIZERS AND MAIN PLATES, AND INVITING DINERS TO VIEW THE MEAL HOLISTICALLY.

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the ambience of the restaurant—the desire of the staff to provide a perfect experience was notable, and I chuckled to myself as I thought about the contrast of the apathy shown by the waiters in a typical tapas joint back in Spain. A moment later I was truly amused, as I commented to my date that this was the first time I’d been to a restaurant that left the prices of the plates off the menu. “What are you talking about?” he said “I have prices on mine.” So patriarchy is still alive and well in the upper spectrum of the French dining world. My eyebrows raised at this overly-formal touch, but were soon relaxed by our server’s hearty approval because I had selected her favorite dishes, not to mention the arrival of a selection of breads (I chose olive, and later, lemon) and a glass of white

dish nestled in its own stand, designed by J.L. Coquet – the type of dishes that come with a brand name and cost €100 for an egg cup.

As the designer dishes were cleared, someone came around with a special tool to scoop the breadcrumbs off our table and little white squares to cover any drips on the tablecloth – thrilling details for my vague OCD. This kind of touch, added to my companion’s comment that he kept unexpectedly finding his water glass full, showcased the extreme attentiveness of our wait staff of five. Combine this with details like the verbena-scented hand towel offered before a course, the exquisite presentation of each dish, and the thirty years separating us from the other diners, and I actually felt borderline uncomfortable at the deca-

Frog’s legs, pan-fried and tempura style, with smoked tomatoes and basil

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Cod poached in olive oil, New Zealand spinach sprouts and grapefruit

dence surrounding me. However, this sensation was calmed by the fact that none of the other diners were paying any attention to anything but their food and their companions.

Soon my appetizer arrived, having left the perfect amount of time between itself and the mousse dish: enough for me to savor the remnants of the flavor and enjoy the wine and conversation for a few minutes, but not so much that I began to wonder when it would materialize. For my date, they brought a plate of foie gras, each bite housed in an edible translucent shell, with curls of smoked ham and delectable sweet onions that were ineptly translated on the English menu as sweet corn.

The sweetness from the onions with the smokiness of the ham and the rich umami taste of the foie gras was an echo of the smoky-sweet combination that Roucheteau introduced at the beginning with his sausage mousse and Granny Smith topped flatbread. My own appetizer consisted of frog’s legs presented in two cooking styles: tempura and pan-fried.

The three sauces: green pesto, red smoked tomato and white garlic, whimsically speckled the black plate in dots of the ideal size for one of the pan-fried morsels. The tempura legs were something like miniature drumsticks, still possessed of their tiny bones as a makeshift handle for the bite. The white meat was moist, tender and delicious, and would have done well enough on its own even if I had not had the delicious tomato and garlic sauces—the pesto was a bit lackluster. The morsel sized portions of the appetizers made it so I never once had to pick up a knife, and the plates lasted longer because of the tiny dimensions of each bite (enough to get the rush of flavor). All the same, I couldn’t help but give a melancholy sigh when the surfaces were empty.

Now it was time for the main affair: the entrees. I was practically shivering with excitement for mine because I’d ordered veal—a meat I was only introduced to a year ago and still lament having lived two decades without. Specifically, I was anticipating veal sweetbreads with sage. The five lumps of gland-meat covered in a crispy breading arrived

on yet another black plate. The sage itself sat atop a pile of girolle mushrooms that rested upon what can only be described as tubes of artichoke leaves filled with artichoke puree. The sweetbreads were crunchy on the outside with an inside so beautifully tender that it nearly dissolved in my mouth. However good these were, I was surprised to find that my real favorite, and the crowning item of the meal, were the artichoke tubes. The puree had a heavenly smoothness that rendered the pure artichoke flavor a whole new experience, and was complemented beautifully by the crunch of the peppery girolles. I couldn’t take my mind off them for days afterwards.

My date ordered cod poached in olive oil on a bed of New Zealand spinach, which was circled by a lemon shallot sauce that allegedly included grapefruit. The presentation of the dish was perhaps the most beautiful of any we received, the shiny skin of the fish even remained on top. Sadly, that was the most the dish had going for it; although the spinach was doubtlessly delicious and the fish boasted a texture as soft as butter, the sauce was uninspiring, and the cod flavorless. We decided between us that I had won the entrée round by a long shot with my veal, and he had won the appetizer round only by a smidge with his foie gras dish. After a good bit of savoring, we had completely cleaned our plates.

Now, the restaurant subtly transitioned to dessert. They wheeled out a cart covered in cheeses that I had admittedly been staring at with covetous eyes all night as it had made its rounds to other tables. From the wide selection, we chose three that ranged from sharp to soft and came with a sprinkling of pistachio crumbs and strawberry jam. The plate was complete with recommendation of the order in which the cheeses should be eaten (mildest to sharpest). Next, we received a small dish of strawberry ceviche with grapefruit sorbet and meringue on top, in which the bitter and sweet elements overcame the salty tastes of the prior plates and neutralized our palates.

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After dinner delights: Homemade wafers topped with apricot, mint chocolate macaroons, and passion fruit garnished with gold leaf

To finish off the affair, we received our fruity sorbet-dominated desserts. Mine was a flaky soufflé filled with succulent passion fruit, which miraculously managed to maintain its coldness while the soufflé dough was warm, creating a spectacular temperature contrast to complement the delicious flavors and textures. On the side of the soufflé was a coconut sorbet that sadly melted too fast for me to have more than a couple bites of it. The other dish was a creamy lemon and mascarpone mixture side by side with a portion of pineapple verbena sorbet. Because I can’t resist a dessert cheese, the champion of the dessert dishes was the lemon mascarpone mixture.

Stunningly, after so many courses, I was not stuffed, just pleasantly full and emitting an aura of total contentment. A nice touch was the complimentary tray of three additional dessert morsels for each of us; it gave a nice symmetry to the meal by reminding us of the three amuse-bouches we’d received at the beginning (in addition to brightening up the business of paying the check).

Several things struck me about the experience of Lancaster. The obvious is the continuous delivery of superior taste and service, but these are things one would hope to expect from a Michelin-starred restaurant. What I particularly enjoyed was the chef’s appreciation for viewing the meal as a whole; each dish interlocked seamlessly with the next because of his elegant use of tastes that complemented each other impeccably. Among these were classic tastes, such as citrus, umami and the herbs that typically complement white meat (e.g. basil or sage); but Roucheteau made sure to additionally in-

clude distinctive choices in the menu that kept his food unexpected and modern—verbena and hazelnut come to mind. Furthermore, although I may have noted and enjoyed particular flavors (the bold artichoke puree that still haunts me), no flavor was used to overpower others or trick the taste buds; they worked in an intense harmony that made each dish a coordinated delight rather than a struggle for the palate’s attention.

The presentation was consistently stellar and pleasing to the eye, and the families of colors on the plate were even impressively coordinated, showing a preference for warm colors with splashes of green. Lastly, the order of each intermediate dish and the effect it would have, not just during, but after eating it was thoughtfully designed as well. After each strongly tasting course, the palate was returned to equilibrium with a neutralizing influence, so that even after our desserts, a mint chocolate macaroon was included in the final plate to provide a burst of freshness with which to finish the meal.

While the wait staff showed tremendous respect tempered with warmth in their treatment of us, I was even further impressed with Roucheteau’s respect for his diners’ palates. At the end of the meal, I had been lifted into a state of culinary-induced euphoria, and yet paradoxically, this elevated state was accompanied by a profound equilibrium imparted by the meal’s progression. This, to me, perfectly fulfilled the luxury I had gone in search of for the IBR—intense quality in all spheres capable of affecting not just my palate, but my entire person. IBR Creamy lemon with mascarpone, refreshed pineapple sorbet with verbena 46

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AUTUMN/WINTER 2013

The Russian Elite Across Borders

BY KRISTINA KULIK C’16

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e hear more and more often that the face of the world’s elite is changing. In the international arena, we see new players from regions where emerging capitalist markets have created opportunities for entrepreneurship and renewed business development.

Russia is one of the strongest examples of this development.. A Russian billionaire, often referred to in the international press as an “oligarch,” is a special phenomenon that is a variation on the traditional image of a Western magnate. The typical Russian counterpart is in his mid-forties and self-made, having undergone the shaky transition from the Soviet Union to modern Russia.. The life story of one such Russian businessman, who has repeatedly secured top positions on Forbes with a net worth of $14.4 billion, is a pure exemplification of this kind of success. Orphaned as a child, Roman Abramovich started his career in a small plastic toy business before his involvement in the large oil company, Sibneft, jumpstarted his journey to becoming the 50th wealthiest man in the world. He is particularly known in the West as the owner of Chelsea Football Club, which he bought for £140 million in 2003.

Another example is 49-year-old Mikhail Fridman, who sold rugs and organized a window-washing business on his way to becoming the 43rd richest man in the world.

All of these newborn magnates gained their capital during the nineties and catalyzed Russia’s movement to become third on the list of nations with the highest number of billionaires, behind only the United States and China.

The international influence of this group has grown substantially in the last several years, and its members have formed close-knit communities outside of Russian borders. The location that has been attracting most of the Russian business and political elite is London, the financial capital of Europe. The city has attracted so many Russians that it has earned the nicknames “Londograd” and “Moscow-on-Thames.” At least three hundred thousand Russians are living in London, and theyhave formed their own cultural community in the British capital. Journalist Oksana Morgunova, in an interview with the Telegraph, observed, “I believe that we are currently witnessing the formation of a new national minority in the UK. More and more Russians are arriving here with both British and Russian passports.”

In this foreign environment, the “oligarch” elite separates itself from the vast majority and restricts its circle to certain business partners from Russia, forming a foundation of trust and cooperation in the business

context. This trend is rooted in the traditional Russian protocol of establishing a relationship on a personal level and gauging detailed insight on the personality of potential business partners before executing a joint project. On the other hand, the increased globalization and interconnectedness of international markets catalyzes the practice of partnering with foreign investors, with London as the home base for these interactions. The desire to work with international partners has therefore grown among Russian entrepreneurs, who were not able to engage in such cooperation in the Soviet Union.

In particular, Russian billionaires are members of the newest group of players in the European and American real estate markets. The Russian elite in London primarily invest in real estate in districts such as Kingston, Wimbledon, Chelsea and Notting Hill, where they compete with their Chinese and Saudi Arabian counterparts. For example, Abramovich purchased Lindsey House on the Kingston Palace Gardens in West London in 2011, previously owned by Belgian hedge fund manager Pierre Lagrange. The house has fifteen bedrooms, extended gardens, a tennis court, a health center and a garage for the oligarch’s six vintage Ferraris. The price of the house was £90 million.

Next door to Abramovich lives the founder of Access Industries, Leonid Blavatnik, in a £41 million “smart” residence with ten bedrooms, an orangery, swimming pool, gym, in-house cinema and remote-controlled gates.

Alisheer Usmanov, famous for making his fortune out of plastic bags—such a scarce commodity in the Soviet Union that people washed and reused them—is currently one of Russia’s biggest Internet investors and a major stakeholder in Arsenal Football Club. In 2012, he bought Beechwood House, a Victorian-style building that used to belong to a Qatari emir, who had purchased it from the Saudi Arabian royal family. The price of the residence is £77 million. His secondary residence is a five-century-old Tudor mansion in Surrey, which was given by Henry VIII to Sir Richard Weston in exchange for denouncing Lord Buckingham to death.

Oleg Deripaska, one of the most politically well-connected Russian billionaires, built his fortune in the aluminum busi-

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ness and is closely acquainted with the likes of Bob Dole, Nat Rothschild and James Wolfensohn. Deripaska’s choice of homes was the former property of the Bedford Dukes. The price was £50 million.

The villa Aldworth House used to belong to British poet Alfred Ten-

nyson. In August 2009, it was bought by Timur Artemiev, a founder of the Russia’s largest mobile phone retailer with over 5000 stores across Russia and Belarus.

Aside from their taste in real estate, these post-Soviet entrepreneurs have similarly high standards for the education of their children while abroad. While Institute La Rosey, Eton College, London School of Economics and the University of Cambridge are popular choices, many travel across the pond for their college degrees. The sole daughter of Sergey Lavrov, Russia’s Foreign Minister, studies at Columbia University, while Viktor Vekselberg, owner of the Renova group (Russia’s largest conglomerate) sent his children to Yale. These decisions are often also accompanied by a real estate purchase. Dmitry Ribolev, for example, bought his daughter Ekaterina an $88 million penthouse at Central Park West as a getaway from her college in Massachusetts.

A more historical destination for upper class Russians is the Côte d’Azur in the French Riviera; the trend to vacation in Nice was established by the Russian empress Aleksandra, wife of Nicolas I during the first half of the 19th century. Since then, the French Riviera has attracted the Russian artistic and intellectual elite that purchased real estate and formed its own community on the coast.

Such villas from the 1800s still house historical artifacts from the time, including first editions of Chekhov, Tolstoy and Dostoevsky. The present day Côte d’Azur is a unique place, where the Russian political, cultural and business elite gathers by the sea and escapes from the cold weather and busy atmosphere of Rus48

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sian cities. Restaurants offer Cyrillic menus, Russian flags fly in front of local hotels and Russian music blasts in clubs. Here, Russian cultural celebrities unite with Russian business moguls who prefer to avoid publicity. The region plays host to a unique networking potential for groups with diverse backgrounds in politics, business and media, who all share one commonality: They are wildly successful.

Along with the Russian penchant for seaside living comes a penchant for living at sea.

Eclipse, the yacht ranked number one in the world

by Forbes with a length of 533 feet and two inches, belongs to Abramovich. It has two helicopter pads and a sixteen-meter pool, and until recently, was the longest in the world.

Interros Chairman Vladimir Potanin’s yacht, Anastasia, 247 feet and eight inches long, has six VIP cabins that can each accommodate twelve passengers. On the main deck there is a dance floor, full-service bar and a 2700-gallon aquarium. When he is not using it himself, Potanin charters the boat for $700,000 a week.

Aluminum tycoon Oleg Deripaska purchased a 238-foot-long yacht that can cruise for 5,000 miles without docking. It can reach speeds of up to eighteen knots and has a 21-person crew. The dining room ceiling is adorned with hundreds of miniscule blinking lamps to simulate the night sky as guests enjoy their dinner below.

After the collapse of the Soviet Union twenty years ago, the economic and political future of Russia was ambiguous. The political elite of the time led the newly formed country through a rapid transition to a free-market economy, introducing capitalistic values to a traditionally egalitarian society. The Russian business elite entered the world market of luxury goods – and yielded a number of experienced players. The desire to become members of the global business scene and the aesthetic, material aspirations of Russian billionaires have incited them to travel to other parts of the world, where they garner attention and impress with their self-made wealth.

Needless to say, Russian “expansion” abroad with its demand for luxury goods is growing, and we will be seeing more and more Slavic names appearing in the news in this context. IBR

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Luxury Brands and the Risks of Comparative Advertising in Brazil

BY MARCO ANTONIO MARCONDES PEREIRA

Marco Antonio Marcondes Pereira is a public prosecutor from São Paulo, Professor of Business Law at Universidade São Judas and Professor of Law at Damásio de Jesus Law School. He obtained his JD and LLM from Pontifical Catholic University of Sao Paulo. He is also a member of the Brazilian Association of Industrial Property – ABPI.

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ither in first-world countries or other regions where industrial and trade activities are still booming in an attempt to reach high-performing economic standards, the market value of brands in general is undeniable. It is often a key topic for professionals and scholars in all aspects of business. As a key symbol identifying products and services, the brand’s purpose is to announce goods and services and attract consumers. Its goal is to engage and lure potential buyers, which makes it an icon of social class and wealth. Brands dream about becoming a high-status reference, which is why they make billion-dollar investments in economic agents such as marketing and advertising. The pinnacle of such a dream becoming reality is the brand’s qualification as a luxury brand, making it directly related to goods of renowned attractiveness and quality.

The Brazilian luxury brands Daslu, H.Stern, Forum, Osklen and Fasano, among others, have been gaining momentum even in the foreign market; in the local market, the luxury segment accounts for approximately US$12 billion per annum, according to a survey conducted by the Digital Luxury Group, recording a growth rate of 24% in 2012, according to an article from Isto é Dinheiro Magazine, 04/24/2013 edition. Such development raises formal jobs, both directly and indirectly, a fact that cannot be overlooked in Brazil, or anywhere else for that matter.

Within this backdrop of competition and investments, the main concern of manufacturers and their investors to protect the brand has increased in emerging countries. This is mainly due to the growing violations of industrial property laws by criminals who unlawfully copy products and services from luxury brands, or simply by associating such brands with other products completely unrelated to the original quality and attractiveness standards. This criminal competition scenario also ap-

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plies in Brazil, which has required victims to raise the bar in anti-piracy and unfair competition initiatives.

The copying and forging of third-party goods is simply referred to as “piracy” and, despite its potential to generate great losses to brands and proprietors, curiously enough, such activities ultimately strengthen the violated luxury brand’s image. After all, one only copies what is worth copying. The long-term issue with such process is that the brand can eventually be diluted by uncontrolled consumption of inferior-quality products. Despite its severity, however, copying and forgery may not be as bad as comparative advertising after all.

Advertising is how brands make themselves known, reaching for their ultimate goal: transforming consumers into long-term loyal partners.

Advertising also informs consumers of the qualities and benefits of certain products and services, subject to the principles of proper advertiser identification and the truthfulness behind advertised products. Such rules, however, should never strip advertisers of their creative and artistic powers—either in printed, television, radio or virtual media.

An extensively-used strategy nowadays is comparative advertising among competitors, based on the argument that this process clarifies consumer doubts. Widely accepted and encouraged in several countries, particularly in the US, it is not banned in Brazil, since the Brazilian Advertising Self-Regulation Council (CONAR) admits such practice under certain conditions, as per its Article 32: “Such method’s greater purpose must be clarification or protection of consumers; its basic principle must be objectivity through comparison, considering that psychological or emotional subjective data do not constitute a valid comparison basis for Consumers; the induced or effective comparison must be duly supported and evidenced; regarding consumer goods, such comparison must be made exclusively between products manufactured

ADVERTISING IS HOW BRANDS MAKE THEMSELVES KNOWN, REACHING FOR THEIR ULTIMATE GOAL: TRANSFORMING CONSUMERS INTO LONG-TERM LOYAL PARTNERS.

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in the same year, and no products from different periods of time may be compared, unless if used as reference to indicate evolution, which in this case must be duly stated; competing brands and products must not be mistakenly associated; unfair competition and damages to product or brand images of other brands is prohibited; the corporate image or reputation of third parties must not be used without due justification; whenever products with different prices are compared, such condition must be clearly stated in the respective ad.”

Considering the nature of a luxury brand, one cannot help but question whether it is possible to practice comparative advertising while abiding by all the conditions set forth by Brazilian laws. More specifically, how can a comparative advertising piece for a luxury brand

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accused the ad as being unethical and based on insufficient and inaccurate data. The final deliberation summary, published on CONAR’s website (www.conar.org.br), “Did not see fit to justify a product’s quality based on brand recall, emphasizing that, according to the results of the respective proceedings’ survey, most interviewees did not remember the truffle’s brand, and the question formulated by the institute did not induce product consumption answers. It proposed changes in the campaign for both statements. Its vote was unanimously accepted.”

There are even more barriers and obstacles in protecting luxury brands against comparative advertising. A good example is the episode involving the luxury brand Daslu in 2005, which never even reached the courtroom, but gained a lot of attention. An NGO in Rio de Janei-

THE COPYING AND FORGING OF THIRD-PARTY GOODS IS SIMPLY REFERRED TO AS ‘PIRACY’ AND, DESPITE ITS POTENTIAL TO GENERATE GREAT LOSSES TO BRANDS AND PROPRIETORS, CURIOUSLY ENOUGH, SUCH ACTIVITIES ULTIMATELY STRENGTHEN THE VIOLATED LUXURY BRAND’S IMAGE. AFTER ALL, ONE ONLY COPIES WHAT IS WORTH COPYING.

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not be characterized as use of its corporate image or reputation? One could argue that such a comparison is valid, provided that it is not performed without due justification. However, this does not seem to be the point. After all, what justifies comparison? Is information for consumers enough? A thirty-second or one-minute advertising piece is surely not sufficient to completely clarify all differences and advantages between the compared services or products. This is also true regardless of whether the ad is published via the Internet, newspapers, magazines, billboards or radio. In all mediums, the information is limited and does not allow the true analysis of criteria used in such competitive comparison.

The evolution of demands regarding comparative advertising is evident in CONAR. In 2001, out of a total of 264 suits filed, 7.58% were related to comparative advertising. In 2012, out of 357 suits, the percentage rose to 11.7%. As it is clearly evidenced in Brazil, such practices have considerably increased and have often hindered legal disputes, and therefore are not always efficient.

Despite the increasing complaints within the private self-regulation environment (CONAR), only a few cases involve comparative advertising in Brazilian courtrooms, including those related to common brands.

In April 2013, CONAR deliberated over a dispute involving two chocolate manufacturers. Cacau Show launched the campaign in which it clearly stated its primacy in making truffles, using expressions such as “Only we make it,” and “Unlike anything you’ve ever seen. Cacau Show, the best truffle in Brazil.” The company’s competitor, Chocolates Brasil Cacau,

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ro that defends prostitution as a profession launched the Daspu brand, and Daslu initially intended to sue the NGO for brand association and unfair competition. Heightened media attention, which eventually promoted the new brand (unregistered), as well as personal issues of Daslu’s owner with the justice system, prevented the case from reaching courtrooms. Not considering the values defended by this NGO, there is no doubt that its goal was to use the luxury brand’s image and reputation for its own benefit. This is an example of an act of unfair competition that, despite not being duly tried, extends far beyond mere satiric comparison.

As the Brazilian market grows, and with it the demand for both foreign and local luxury brands, a significant increase in comparative advertising among such brands is also expected. This will require luxury companies to inject more economic and intellectual resources to protect their greatest asset: the brand. Monitoring violations toward luxury brands and investing in qualified professionals from different knowledge areas (business, marketing, statistics, advertising, economy and law) will greatly contribute toward raising the billion-dollar investments already invested to protect brands. In addition to such private investments, it is recommended that public authorities establish more severe punishments for industrial property law transgressors, namely those who use illegal comparative advertising to preserve the creative capacity of executives and formal activities of all parties directly or indirectly involved in building luxury brands. IBR

AUTUMN/WINTER 2013

The Wharton Latin America Conference is a student-led event held at The Wharton School of the University of Pennsylvania.

The 2014 conference will welcome over 300 graduate students and professionals.

The purposes of the conference are to showcase Latin America´s economic, cultural and political potential and to highlight the opportunities and challenges that the region faces.

Renowned Keynote Speakers Insightful Panels: Private Equity, Investment Outlook, Entrepreneurship, Education, Industry CEOs Wharton Latin America Private Equity Competition Celebration Party (not included)

Students (valid .edu email) Early bird (Jan 22, 2014): Regular:

$29 $39

Professional Regular:

$95

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BY DAVID HIRSCHY W’16

Professor Jonah Berger on Contagious Luxury Renowned Wharton marketing professor Jonah Berger is one of the world’s top authorities on social dynamics and viral marketing. His book Contagious: Why Things Catch On, published in March, 2013, was received as a bestseller by both the New York Times and the Wall Street Journal. IBR had an engaging dialogue with Professor Berger about these research interests and their relationship to luxury retail.

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nternational Business Review: How are the drivers of luxury goods’ k-factors different from the drivers of mass goods’ k-factors? Could you describe the concept of “social contagion” within the context of luxury markets?

Jonah Berger: Luxury goods are often more highly desired than mass goods, so people’s propensity to talk about them may be higher. That said, even if people learn about a luxury product, the price may prevent them from buying it, so the overall effect of social influence on adoption may be inhibited.

IBR: In Contagious: Why Things Catch On, you discussed the example of Barclay Prime’s $100 cheesesteak. Could you elaborate on how this is an example of successful viral marketing of a luxury good?

JB: Barclay Prime’s $100 cheesesteak is a great example of finding the inner remarkability and using it to help the product catch on. There are dozens of high-end steakhouses in Philly, so it is hard to cut through the clutter. By making a $100 cheesesteak, Barclay Prime did two things. First, it separated itself from its competitors in a remarkable way, and second, it created a story that was frequently triggered by the environment. People are often cued to think about cheesesteaks in Philly, so the story of the $100 one at Barclay comes to mind often.

IBR: What is it about an idea or product that causes it to go viral on a psychological level? To what extent does this psychology extend specifically to luxury goods?

to seem wealthy and high-status, and showing you bought something expensive is one way to do that.

IBR: What are some of the best strategies that you’ve seen highend companies use to drive sales? Is there a luxury brand or company that you believe has a particularly successful campaign to market a viral product?

JB: I love what Burberry did with their website. It’s extremely simple, but they let users submit pictures of themselves wearing Burberry and they put some pictures up on the site. People who were picked loved to share the news with their friends, which really drove attention to the brand.

JB: There are six key STEPPS that drive virality that I talk about in Contagious: Why Things Catch On: social currency, triggers, emotion, public, practical value and stories. Each is a psychological driver that leads people to talk and share.

IBR: How are luxury brands embracing social media to market their products? Similarly, how are consumers driving virality through their own social media posts?

IBR: Is exclusivity still the draw to luxury goods, or have luxury goods become more accessible over the years?

JB: It’s hard to do social media if you’re a luxury brand, because part of the brand identity is about being aloof, distant and hard to get access to. Tweeting all the time can make the brand feel too accessible and reduce its perceived value.

JB: Exclusivity is still a draw, but it’s more about knowledge than money. The web and easy credit have made it easier for anyone to get access to luxury goods. Now it’s about distinguishing yourself through taste and access to things that not everyone else knows about.

IBR: What is the psychology behind conspicuous consumption?

JB: People want to signal desired identities to others. They want

IBR: Do you see any regional differences in luxury good marketing (for example, between emerging markets and developed nations)?

JB: Status symbols are even more important in emerging markets. People see them as a way to distinguish themselves from the masses. IBR

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The Business of Scent: Interview with Marc Chaya

BY DAVID HIRSCHY W’16 AND LAUREN ZAKARIAN-COGSWELL W’15

Luxury retail is a broader business than just haute couture, as exemplified by IBR’s discussion with Marc Chaya, CEO of the acclaimed perfumery Maison Francis Kurkdjian Paris. Prior to cofounding the fragrance enterprise with celebrated perfumer Francis Kurkdjian, Mr. Chaya worked for twelve years at Ernst & Young, where he led the global telecoms business. The business model of Maison Francis Kurkdjian Paris harkens back to an earlier time of the fragrance industry when the perfumer was better recognized and had more control, but the approach is anything but dated.

Their groundbreaking work is changing the concept of the modern perfumery, and IBR was pleased to speak with Mr. Chaya about the business side of the luxury perfume world.

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nternational Business Review: Can you summarize how your partnership with Francis Kurkdjian came to be? What brought you to the extremely successful position you are in now?

Marc Chaya: Before I decided to start this company, I was with Ernst & Young for twelve years. I was made partner in nine years, working mainly in business advisory services. When I met Francis ten years ago, I was still a senior manager with Ernst & Young, and we became great friends. It was right after a Jean Paul Gaultier fashion show, and I was sitting next to this gentleman who I asked casually, “What do you do in life?” I had no clue that perfumers existed and what it meant to be one. He simply said, “I am a perfumer,” and I learned he was the creator of Jean Paul Gaultier’s “LE MALE.” It was the best-selling men’s fragrance in the world at that time, and it’s still one of the top three best-sellers. He also had worked with every leading fashion designer creating wonderful and successful scents with them. He had forty blockbusters in his portfolio from working with Narcisso Rodriguez, Giorgio Armani, Elizabeth Arden and others.

From there, we became friends. I’ve always been into business, and he’s always been looking for support, because as a creative mind, you don’t necessarily have all the skills or what it requires to have a successful business. I started working with Francis out of friendship. He was my evening and nighttime job, because I was still with Ernst & Young. We worked hard to bring the perfumer back to the driver’s seat, because the perfumer is a real 54

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artist. When a perfumer creates a scent, it’s not just about mixing essential oils. It’s about having a vision of an emotion. People often mix up the chemist and the perfumer. It’s the same in painting: you can be a painter and mix colors, but you won’t necessarily get to the level of a master painter who ends up with works in a museum.

I thought this misunderstanding was very unfair. Perfume was the only form of art where the industrial entity had taken over. If you visit any other form of creativity, this doesn’t exist.

If you’re Marc Jacobs, you work with Louis Vuitton—the two names co-exist, and you still can have your own line. In the past, perfumers used to be their own houses. The brand Guerlain, which is part of the LVMH Group, was started by a family of perfumers in 1828. It only changed with time and Coco Chanel.

In the story of Chanel N°5, Coco Chanel met with perfumer Ernest Beaux and commissioned him to make her a scent to give as a gift during a fashion show. Ernest Beaux came back to her with 25 vials. Inside every vial, there was a fragrance, and she picked out number five. He asked her what she’d like to call it, and she said, “The show is on the fifth of May, and I picked up vial number five, so I’ll call it N°5.” From there onward, Chanel customers loved the scent, and then it became commercial. The whole industry changed from the model of going to a small craftsman to going to an industrial lab who will license my name. If you look at the industry today, Procter & Gamble, L’Oreal, BPI, Estée Lauder, Coty and the LVMH Group are the biggest license holders in the world. If you go to LV Group, they have fragrances for

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Marc Chaya (Photo credits: Nathalie Baetens)

Guerlain and Dior and are working on an LV fragrance. If you go BPI, which is part of the Japanese group Shiseido, they have Jean Paul Gaultier, Narcisso Rodriguez and others. If you go to L’Oreal, they have Armani and Yves Saint Laurent. Those license owners are marketers, and they write the design brief with all of the specifications. They then go to the labs, and the labs hire perfumers. The perfumers are hidden behind the curtains. They get the brief, and they start working for free. Usually there are two to three labs working in competition. Every lab has one or two star perfumers working in competition against another perfumer inside the same lab, as well as against the perfumers in the other labs. After one year and maybe 900 trials, someone is going to win. Perfume design is not like the Olympics; there are no bronze and silver medals. There is only the gold medal. Francis has made his career with this scheme, working for others in the dark and building successes for those intellectual property owners who put the fragrances to market. That was the norm, but it was shocking to me. I thought it was so unfair, because I respect the creative mind and his history of success. Another group of players emerged about ten years ago that we call the niche players. A mass fragrance, as compared to a niche fragrance, is any fragrance that you can find everywhere, like Jean Paul Gaultier with 25,000-30,000 doors globally. You don’t have to look for a long time to find a mass perfume. Niche companies started offering different experiences to customers, like the French com-

panies Diptyque and Frederic Malle. They started having their own stores, and those companies started bringing a new level of service and quality to their customers with boutiques and personalized counters. The scent is no longer the same scent that you are going to smell on 200 other people, and the product is more about creativity, precision and talent. What we’ve started seeing across the globe is that department stores have started embracing and offering retail space for niche brands. Now, luxury department stores have more niche brands than mass brands. If you go to Bergdorf Goodman, Barneys, Neiman Marcus or Saks, you have 95% niche brands and 5% mass brands. After the highend department stores started embracing niche, the independent retails, concept stores, and multi-brand perfumeries have opened across the globe. Every single European country has at least three or four multi-brand, high-end, niche fragrance stores. The retail metric for niche brands can now go up to 3000 doors. Mass brands like Chanel have around 28,000 doors, but with 3,000 doors, you can still have a strong business. These niche businesses aren’t worth billions, but they’re in the vicinity of millions and hundreds of millions. Last year, there were maybe 500 niche fragrance launches. Today, just about anyone can create a scent and go to a perfumer and start his own line, even though he could not truly claim to have designed it. That discovery was a big disappointment to me ten years ago: that a talented perfumer might never speak publicly, because that was the way that the

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Francis Kurkdjian (Photo credits: Nathalie Baetens)

industry is structured. If tomorrow someone orders a wedding dress from Karl Lagerfeld, it’s going to be Karl Lagerfeld for her.

She would not say that she made it, because Karl Lagerfeld gave her his talent. This is what perfumers do as well. Francis spends months, even years, understanding the DNA of the brand. That requires a lot of talent, so my discussion with Francis at that time was that the perfumer had to regain control. That took us four years. Francis’s dream was also to take perfume outside of the lab, so he worked as an artist on art installations. On our website and Facebook page, there are five or six examples of installations that we’ve done over the last ten years, from Versailles to Shanghai to Florence. Fragrance creation is truly artistic. When we finally decided to start Maison Francis Kurkdjian, people started asking who we are. We are a luxury fragrance house that carries the name of one of the greatest living perfumers of our time. Every morning, more than 300 million people are wearing a scent created by Francis Kurkdjian, yet no one knows who he is. All of the sudden, it’s narcissistic for a perfumer to have his own brand, yet everyday a fashion designer is starting his own fashion brand. Yves Saint Laurent—a huge master of French couture—started his own house with Pierre Bergé, because they

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why I choose to sell next to others in the third group.

If you think of Maison Francis Kurkdjian, the talent is there.

Francis is one of the greatest living perfumers of his generation, and we were able to raise funds. I have twelve years of experience with Ernst & Young where I was driving their global telecom practice, so we had the talent. We also had luck. We started in 2009 in the middle of the crisis, but that was fortunate for us.

Virtually no one was starting that year, so had no competing launches. Everyone was talking about us, and that’s where Maison Francis Kurkdjian is today. We were profitable in our third year, and last year, we had 70% year-on-year growth. This year, we are at 55% year-on-year growth. Our growth is also organic; my vision is that you cannot build a sustainable business in the luxury world if you just open new stores. You can get opening orders, which is great, but many people have failed this way in the past. They raise funds, and they keep opening doors, but they don’t sell or have re-orders. Our strategy was to stick to a certain number of doors and to make sure that our ranking grows in those stores. In those stores, we rank in the top five, and this is sustainable as long as we growing with our partners. In the US, we are long-term exclusive to Neiman Marcus, meaning we are

I WANTED TO CO-COMPETE WITH [THE BEST BRANDS]. I SAY CO-COMPETE, BECAUSE IT’S NOT REALLY COMPETITION. EVERY ONE OF US HAS OUR OWN STYLE.

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had the creative talent and the business talent. For perfume, this was not accepted. When we started Maison Francis Kurkdjian, I already explained to my retailers that I was very selective. Of the 3,000 possible doors, we selected the 300 best where we thought the other brands retailed were at same level as our brand, like Frederic Malle. I wanted to co-compete with these brands. I say co-compete, because it’s not really competition. Every one of us has our own style. I also segment the niche market into three categories. Number one is what I call the narcissistic. I’m not making fun of them, but the narcissistic essentially have an opinion of themselves and just want to create a scent. If you’re very talented, you’re going to step up. People are going to notice your talent if you have it, only 10% of this group has real talent.

The 3,000 niche doors allow this group to exist. Whether they’ll exist for the long-term or disappear is a matter of talent. If they are very talented, they can move to group two. Group two has showcased their talent, and all of a sudden, someone is interested in financially supporting them. In the luxury world, you can’t do anything without business talent or money. Of course, you have to have the creative talent, too. Then you can move to the third group when you have legitimate talent, when you have money and when you have the business and marketing talent. This is

not going into Saks or Barneys. We have 42 stores to address, and we are doing maybe $3 million in retail with Neiman. We can move all the way up to $10 million in three years.

IBR: How do you find that your role differs between when you’re creating a perfume for another fashion house versus when you’re creating one for your own company?

M: The underlying schemes are the same; however, when you’re working with other companies, you have to put yourself in their shoes. You have to understand what their needs are and stay as close as possible to their brand identity. It’s like a playground.

Your playground is structured, and you know that you can only play here. When you’re within your own company, your playground is huge. You can play here; you can play there. Francis has total freedom to use the essential oils whether they are synthetic or natural of his choice. Usually our scents at Maison Francis Kurkdjian are three- to four- times more expensive than scents that are in the industry, because we supply our perfume from the lab with a very low margin. We are able to put a very high concentration and very high quality of fragrance into our bottle.

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IBR: You talked about the niche perfumeries, such as the boutiques where you can go in and tell them what scents you like, and they make a perfume for you on the spot. How do you envision this trend developing and what the luxury fragrance industry will look like in 50 years?

M: This is not a trend. It exists in every other industry. You can go to a Bespoke store and have your shirt for $85, or you can go to Chanel and get your Bespoke shirt. It’s not going to be the same. I think the market is big and polarized. What is your definition of the word “luxury?”

IBR: Well, there is a certain price point for luxury. There’s a certain singularity. If you look at luxury markets in the past, it demonstrates that raising your prices doesn’t always result in less quantity purchased by your customers.

M: If I use those criteria, you can buy an F-16 jet, and that would be considered luxury. It’s expensive and unique, but luxury was

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price, because he cannot serve the world. In fragrance, the only trend that we changed is that perfumers are going center-stage again.

If you look at LV Group, they have a perfumer for Dior. His name is Francois Demachy. It has been two to three years since they publicized the perfumer, and they even created special offers for that third category that I mentioned. You can buy Dior at their standalone or at Sephora, but you can only buy the private collection at Bergdorf Goodman, at Neiman Marcus. You can buy Tom Ford Black Orchid and White Orchid at Sephora, but the private blend is only at Bergdorf Goodman. You can have Bleu de Chanel, but the exclusive blend you can only find at Bergdorf Goodman and Neiman Marcus. This third group has newcomers like us, but it has also the offering of old players like Chanel and Hèrmès. What we’re seeing is that luxury houses are starting to hire and speak about perfumers in the same way that they hire fashion designers for their brand. Francois Demachy at Dior is one of the most famous perfumers, Thierry Wasser is with Guerlain. Now when you go to a Guerlain fragrance counter, there is a huge portrait of Thierry Wasser. This is

LUXURY, IF YOU GO BACK TO THE ETYMOLOGY OF THE WORD, IS ‘TO BREAK’ - TO BREAK THE USAGE OF SOMETHING. LUXURY HAS ALWAYS BEEN ABOUT TALENT.

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not defined like that. Luxury, if you go back to the etymology of the word, is “to break”—to break the usage of something.

Luxury has always been about talent. The number one factor about luxury is time and talent, and this is why it’s scarce and expensive. I always explain to my students the difference between two houses, and I used to give them a case where they have to compare Prada and Hèrmès. I love both brands, but the model at Prada is about big advertising campaigns. Their $500 shirts are made in Bangladesh, but we know that workers in Bangladesh make hardly $1 per day. If you go to Hèrmès, the shirt is made in France. They have secured their supply chain by buying their own suppliers. They spend countless hours looking at leather to pick out the most beautiful section, and it’s hand sewn. This is luxury. Is LVMH still luxury? I’m not sure. In South Korea, there are maybe four or five Louis Vuitton stores in the center of Seoul, but there is only one Hèrmès in Seoul. This is because rich people are becoming richer, and the number of these individuals is higher. I think in fifty years, all of this will change. You’ll have a little perfume store with a very talented person for your Bespoke. If he is very talented, then this perfumer will become successful and celebrated. The more his talent is celebrated, the more people will demand his product, which will increase his 58

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a new trend in the industry, although Chanel has historically had an in-house perfumer. Since Coco Chanel, they always had inhouse perfumers. Jacques Polge has been there since the 1970’s, and he just hired his own son Olivier Polge. Now Dior is doing the same, and LVMH hired Jacques Cavallier-Belletrud for the brand-name LV scent. I think in 50 years, perfumers will be fullfledged designers, and you will see Francis working directly with brands and not being employed by labs. I think this where the industry will polarize. Labs will still need perfumers for middle market, celebrity scents, and redundant releases, but anyone who really wants to work in luxury like Chanel and Hèrmès would have an in-house perfumer.

Some would say this is a disadvantage, because in the status quo, you can ask two or three labs to compete and get the best perfume. Why don’t you do that with the fashion? Why doesn’t Chanel put Karl Lagerfeld in competition every year? How was Karl Lagerfeld successful in building a year-on-year, recurring $4 billion business with his talent? People need consistency. They need to understand the brand, and a perfumer can bring that to a brand. The labs will still compete for mass brands, lower segmentation brands, celebrity perfumes, and scents of other things, like soap. You will also see perfumers work with brands

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Photo credits: Nathalie Baetens

in the same way that brands hire designers. You will see Jacques Polge at Chanel for perfume and Karl Lagerfeld for fashion. You will have Marc Jacobs for LV fashion and Cavallier for perfume.

Also, if you go to the Hèrmès website, Monsieur Ellena is now signing a paragraph on every scent. Very proudly, we started this trend. At the time I started this project, people said the industry is all about the fashion brand and that no one cares who the perfumer is. However, being a perfumer requires talent. People do want to know who has designed their scent. They say that scent is the most intimate medium that you can wear. You can’t see it, so it isn’t fashion. It doesn’t help your skin, but it changes your aura. It’s invisible, but at the same time it plays with your emotion. One challenge in the future is how we are going to renew the perfumer talents. Are we going to be able to train new talent? Are there enough schools? I am not sure. It’s also going to be important to explain to customers how the industry works, because there is a lot of regulation. You can use something in a scent, and you won’t be able to use it in Japan if you declare it as a solvent. However, if you declare it as a colorer, then you can use it in Japan. Regulation is too heavy, and it’s inconsistent.

Perfumers should not have to stop using an essential oil because 3% of the world is allergic to it.

IBR: Could you speak to the supply chain for fragrance creation?

What is the network like for sourcing perfume ingredients?

M: It’s complex, which is part of why I think the labs should not be worried about their future. The labs will always be there, and I don’t think that luxury houses will stop going to labs even when they have an in-house perfumer. It’s the not the job of Dior to manufacture a perfume and to source these essential oils, so they will still need those big labs. The only thing that would change would be that the perfumer would go from the lab to the luxury house. The supply chain is complex though, because there is a limit to how many roses you can harvest every year. The market for fragrances is exploding, which is great, but there is limit to how much rose you can cultivate. There is fierce competition for essential oils. We are going to be using more and more synthetics in the future. Since the end of the 18th Century, perfumers have been using synthetics, and we need to break the misperception of people on them. Synthetics in fragrance are necessary, because not all flowers allow you to extract their scent. Some have to be put into scents synthetically. Synthetics also allow the perfumer to have greater creativity. They allow to perfumers to break the scent of a rose in nine or ten subcategories, so that you have much more to work with. I think this supply chain is key, and I

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think that labs will need to be more specialized and more competitive with sourcing the essential oils. At the end of the day, there is a limit to what Mother Earth can supply in terms of flowers and lavender.

IBR: How would you describe the creative process for perfume production? Does the collection define the direction, or does the direction define the collection?

M: It’s a circle, and it can be either vicious or virtuous. If both the scent and the direction are good, then one is supporting the other. If either is bad, then you will fail. If they are both bad, then you will fail even faster. The direction is about really finding luxury and about respecting the customer. Our products are made in France, and there are hundreds of hours behind every product that we put to market. We try as much as we can to share our values with our suppliers about respect, integrity and understanding each other’s needs and partnering for the long term. At Maison Francis Kurkdjian, our luxury is the scent. Of course, the scent has to be in a beautiful package, but the scent itself is maybe three- to four-times more expensive than other scents on the market. Francis thinks of the collection from an artist’s point-of-view as a fragrance wardrobe. Some women say to Francis that they haven’t yet found the scent of their life. In your wardrobe, you have the Balenciaga bag, the Chanel bag, the Louis Vuitton bag and the Louboutin shoes. Every day you chose to wear different things to be sexy and elegant. Why stick to one scent? The way he created the collection, there are scents for shopping, partying, being sexy, being serious and being dramatic. There is a scent for every aspect of your personality.

In short, Francis created a luxury fragrance collection like a wardrobe. He also says that fragrance is like dating. You could either do speed dating, go to Sephora and spray a fragrance, like it, and buy it, but the next day you hate it. You can do that, or you can look for a lifetime scent, which takes more time. You have to date and then get married. It’s all about time. Your relationship with the scent can be instantaneous, or it can take more time.

The only message from a brand perspective that we say to our customer is that we don’t have to stick to one scent in the same way that you can love so many things by one fashion designer.

You can come to Kurkdjian, and you can find a warm scent, a woodsy scent, and a sensual scent.

IBR: When you’re marketing a product, how do you get around the fact that your consumers naturally don’t have as much background knowledge like an industry member would?

M: Your message has to be coherent. We can do whatever we want in our office, but at the end of the day, it has to go to the counter. When we started Maison Francis Kurkdjian, we had to have a better counter experience, and we had to sell. Your brand’s merchandising has to automatically give the brand identity. For us, for example, the inspiration of the line is Paris: the city of love and light. Our stoppers are in zinc and gold. When you go 60

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to Paris, you have the gold monuments and the zinc rooftops of Paris. We also claim that we are the house of a perfumer, so there is the portrait of Francis and also the picture of one of our perfumes. To ensure the consistency of that, we always use the same art photographer, not a fashion photographer. Our message is that perfume is an art, so all of our photos are very artistic. You have to engage with customers and then visually explain that Paris is our inspiration. Our marketing message is mainly directly to the customer at the counter. We do other marketing, but we don’t do advertising. We talk a lot to the press, and we also have artistic events. Everything we say and do has to be coherent.

If we say that we are a fragrance house and are selling beautiful fragrances, you need to also know how to describe the scent for your customer, so training is very important. I spend about 20-30% of my time on training: how to talk about the scent and how to be technical. Our sales staff needs to know what an eau de parfum is, what the ingredients are, and what the scent pyramid is. In a scent pyramid, you have the top note, the middle note, and the base note. It’s like when you put water, oil, and vinegar together, you have different layers, because you have different densities. The top note is the lightest molecule—usually something citrusy or spicy. It comes to your brain faster, because it’s lighter. In the mix of the perfume that you have in your nose, the predominance of the top note is higher. The middle note is a bit heavier, and at the end of the day what’s left on your skin is the heavy base note. You have to talk about the notes to customers, and you also have to talk about the emotion. If my sales staff doesn’t have those messages, then the business will fail, because at the end of the day, I’m offering a service and telling a story.

The brand name is Maison Francis Kurkdjian, which means “the house of Francis Kurkdjian.” When people come to your home, you need to show them where the living room is, where they can sit, etc., and you need to be very welcoming so that they want to come back to your home.

IBR: What advice would you give to students who are interested in taking on a business role in the luxury fragrance or accessories market?

M: Invest in yourself and learn as much as you can about the business world. If you want to start your own company, you need to have a bit more than just a brain. You need to be open and alert so that you can take your chance. You also need to be humble. Sometimes when you go out from business school, you feel invincible, and that’s really a big threat. You need to be down to earth. You need to be flexible, because at the first year with Francis, we almost failed. You have to reinvent yourself, and you have to be hard worker. I don’t think this is industry-specific.

Make sure you know your finance; you cannot be a business leader without knowing your finance. I tell my team that if you don’t know how to read a balance sheet, then I don’t want to work with you. How can you make your goal if you don’t know what a gross margin is? You also need to be open to others, and you need to be generous. Finally, believe in what you do. IBR

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International Perspectives on Luxury

BY GABRIEL FERRANTE C’16

Luxury of a Different Sort Gold evokes similar reactions of acquisitive desire across the globe.

There are some goods, however, that fetch a high price only in certain nations and are quotidian purchases in the US. The source of the disparity in the price of these goods in the United States versus the rest of the world is rarely a reflection of pure market logic. Instead, it generally reflects the warped priorities of national policymakers. Here are some particularly egregious examples: Turkmen Internet Turkmenistan is commonly known in the United States as “one of the -stans”--the five central Asian states that gained independence from the Soviet Union in the early nineties and that have not made much international news since. However, capitalizing on deep oil reserves, Turkmenistan has had world-beating economic growth over the last few years. Unfortunately, despite this growth in GDP and income, Turkmenistan has not been able to significantly lower the price of one commodity: Internet access. In addition to being punishingly slow, the Internet in Turkmenistan holds the dubious distinction of being more expensive than in any other region on Earth.

Harshly restricted by a totalitarian government, a high-speed Internet connection, which can cost as little as $40 per month in the United States, costs $6,821 per month in Turkmenistan. Accounting for differences in GDP per capita, this would be the US equivalent of costing eye-popping $77,668 (or almost an average yearly income) to go online each month. (At that price, perhaps the ratio of homework to Buzzfeed reading might be slightly higher.)

Despite Internet advances in other developing nations, the Turkmen government has restrained infrastructure construction for current-generation Internet to a glacial pace, and has not shown many signs of changing its approach. The fear of subversion by Internet is overpowering enough that the oppressive Turkmen government has prioritized its own stability over the potential economic gains in reducing Internet access costs—gains which have been common in other societies that have embraced the information age.

North Korean Firewood The economic conflagration that is North Korea is widely known, but starting a literal fire is actually somewhat difficult in the hermit kingdom. After the Soviet Union collapsed, so did the Democratic People’s Republic of Korea’s supply of subsidized oil (often sold at less than 40% of market price).

Air pollution in China

Turning to the resources that they thought their nation had in abundance, the big-wigs of the North Korean government ordered a widespread shift from gasoline-powered vehicles over to “wood gas” cars and trucks. Last used on a significant scale by the Axis powers at the end of the Second World War, wood gas is a horrifically inefficient replacement for gasoline, producing only 66% of the energy of an equivalent mass of gasoline. Compounded by expanded use of firewood for home heating as oil prices rose, this policy denuded the previously heavily-forested northern half of the Korean peninsula.

The change in ecology not only has caused environmental disasters in North Korea, but it has also resulted in a curious situation in the DPRK today: Because of this change, firewood has become a true luxury good. At the cost of $310 per cubic meter of firewood, despite

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ernment has thus far failed to provide a means of public transport for the millions of migrant workers who pour into China’s coastal cities every year, forcing them to use pollution-producing cars. It also has not put in place the environmental protection measures that prevent common industrial processes from turning the sky black in the developed world. As of now, China can afford the loss of productivity and consumer spending that are the natural outgrowths of its utter lack of environmental policy, but even the world’s growth superstar is likely to rue its choice to ignore setting pollution standards once its gangbuster pace of economic expansion becomes more moderate in the coming decades.

the government’s use of gulag-slave labor to gather it, many in North Korea are, ironically, forced to use the now less expensive gasoline for cooking, ignoring the well-documented health hazards of carbon monoxide inhalation and carcinogenic waste products. With the average wage being $120 a month, this price translates to $9,736 for less than a month’s worth of firewood in the United States.

North Korea’s energy problems stem from international isolation due to the nation’s nuclear weapon program, but barring a major shift in foreign policy, the much-abused North Koreans will likely have to endure the status quo for the foreseeable future. Moreover, the ecological and health damage suffered in North Korea due to its waste of natural resources will require decades to fully reverse, hampering the nation not only now, but for generations to come.

Chinese Air (The Clean Kind) Americans have long feared relative decline as a global superpower, but even in China’s long shadow of growing economic and geopolitical clout, they can rest assured that it, at the very least, smells a great deal better in the US. Discussion of air quality in China has recently shifted from good natured complaining to panicked debate concerning how to prevent the major health hazards caused by the abundance of miniscule particulates in the atmosphere.

Facing concentrations that often exceed the entire scale for particulate matter set by health authorities in the United States, China’s nouveau riche have turned to technology to allow them to sleep easy in the heavily-polluted cities where they have made their fortunes. Import restrictions and high demand mean that air purifiers manufactured in Germany and Switzerland (considered the “gold standard” among the upper crust in Beijing and Shanghai) are twice as expensive as they would be in the United States. At 1,600 yuan, these machines cost the equivalent of approximately $7,000 in US dollars putting them out of average Chinese citizens’ budgets. Instead, the common man often turns to hospital masks when commuting to and from his workplace, which is often one of the very factories that spew out so much noxious matter.

However, both of these solutions are stopgap measures, as the gov-

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Legal Angolan Housing Angola is a not-so-quiet success story in sub-Saharan Africa.

Having overcome the disaster of civil war in the last decade, it has transformed itself through oil wealth into one of the fastest growing nations on the planet. Unfortunately, the unequal distribution of this wealth has created mammoth inflation for everyday necessities, especially in the capital, Luanda.

Several waves of migration from the countryside have raised the population of Luanda by nearly 1000% in just 30 years. Unsurprisingly, the growth of the city has not kept up with its rapid increase in residents, and due to the law of supply and demand, the cost of real estate is extraordinarily high. A standard one-bedroom apartment costs the equivalent of 19,202 US dollars for a month’s rent. Worse yet, recent crackdowns on squatters in the vast slum cities that encircle Luanda’s glittering skyscrapers built with petrodollars have only further exacerbated the shortage in recent years.

The Angolan government, owned and operated by the very people who reap the greatest benefits from the resources boom, has little incentive to facilitate the real estate investment that has been a ticket to the middle class in other nations. However, the creation of a stable consumer class would allow Angola to diversify its economy, which has long proven a crucial factor in sustained economic growth, and which today’s Angola sorely lacks. As a result, its current policies, though providing a short-term profit for developers, may reverse the country’s recent economic gains.

In Conclusion...

All of these situations result from the artificial restriction of the supply of goods that, by the ordinary functions of the marketplace, have become affordable commodities in other societies around the globe.

The governments of these nations have created significantly tighter markets, and as a result, the law of supply and demand has driven the prices of these goods far beyond the reach of the ordinary poor to middle-income citizens in these countries.

A lack of foresight characterizes many of these policy choices, but all have been facilitated by small groups with enough power to impose their interests on the rest of the population. In light of the rich world’s obsession with luxury brands, it is worth remembering that the cap of 7,000 Ferrari automobiles produced in 2013 is just as artificial as the restraints placed on the Internet in Turkmenistan. As with nearly all luxury goods, the price for these commodities is high because select groups of people want it to be, not because it naturally is. IBR

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BOARD OF DIRECTORS

Pictured above clockwise from top left: David Hirschy, Matheus Lara, Emily Weiss, Katie Shao, Yamini Nabar, Lauren Zakarian-Cogswell, Rachel Fleszar. Not pictured: James Calvo, Allison Collins, Rebecca Friedemann, Shana Mansbach, Tiffany Tzeng.

Editor-in-Chief

Design Director

Lauren Zakarian-Cogswell

Rebecca Friedemann

Managing Editor

Assistant Design Director

David Hirschy

Katie Shao

Editor

VP Distribution

James Calvo

Rachel Fleszar

Editor

VP Finance & Sponsorship

Allison Collins

Tiffany Tzeng

Editor

VP Operations & Technology

Shana Mansbach

Matheus Lara

Head Copyeditor

VP Subscriptions

Emily Weiss

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IBR’s Favorite Brands ADRIANO GOLDSCHMIED NOT ONLY ARE AG JEANS UNIVERSALLY FLATTERING, THEY ARE THE DEFINITION OF LUXURY JEANS. EACH PAIR IS UNIQUE, EVERY WASH IS AUTHENTIC, AND THE DISTRESSING IS EXECUTED TO PERFECTION.

MIZUNO IT’S NO COINCIDENCE THAT I STARTED DISTANCE RUNNING WHEN I GOT MY FIRST PAIR OF MIZUNOS. THEY GAVE ME THE GIFT OF ONE OF MY FAVORITE ACTIVITIES, AND THERE’S NOT MUCH ELSE I COULD ASK OF A BRAND. -EMILY WEISS HEAD COPYEDITOR

-REBECCA FRIEDEMANN, DESIGN DIRECTOR

FOSSIL

SAMA EYEWEAR

ONE OF THE FEW BRANDS TO OFFER GREAT, VERSATILE MEN’S WATCHES AND BAGS IN THE $100-200 RANGE, NOT TO MENTION SUPERB CUSTOMER SERVICE. I RECENTLY HAD A WATCH REPAIRED, AND THEIR HELPFULNESS AND ACCOMODATION WERE INCREDIBLE.

FOUNDED BY ESTEEMED EYEWEAR DESIGNER SHEILA VANCE, SAMA USES HIGH QUALITY MATERIALS AND LENS TECHNOLOGIES IN THEIR UNIQUELY STYLED EYEWEAR. THE COMPANY’S ATTENTION TO DETAIL MAKES EACH PIECE ELEGANT AND DISTINCTIVE.

-JAMES CALVO, EDITOR

-YAMINI NABAR, VP DISTRIBUTION

ALEXANDER MCQUEEN

CÉLINE

PRIMARY COLORS AND SLEEK LINES. WEARABLE PIET MONDRIAN. IN MY BOOK, THERE IS NOT MUCH ELSE ONE COULD POSSIBLY WANT. -LAUREN ZAKARAIANCOGSWELL, EDITOR-IN-CHIEF

NO ONE CAN INCORPORATE MACABRE AND GOTH ELEMENTS INTO LUXURY LIKE MCQUEEN. AT HIS BEST, MCQUEEN’S DESIGNS ARE EQUAL PARTS TORMENT AND BEAUTY -DAVID HIRSCHY, MANAGING EDITOR

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