In the Luxury Industry, Family Businesses Lead

Rajiv Agarwal

Author: Rajiv Agarwal

Date: Sun, 2016-09-04 18:39

I was speaking to a third generation family business owner, whose Rajasthan-based family firm had been making hand-made custom jewelry for the Maharajas for over 100 years. I was trying to understand the reasons for his success, as a part of my research on innovation in family businesses.

As a part of my research, I looked up the Forbes list of top luxury brands in 2016 (link:http://www.forbes.com/powerful-brands/list/#tab:rank_header:industry_ind...)  and got the following data.

 

RankBrandBrand Value (USD Billions)1-Yr Value ChangeBrand Revenue (USD Billions)Company Advertising
19Louis Vuitton27.3-3%10$4.4B
44Gucci12-3%4.3-
48Hermes11.710%5.4$230 M
58Cartier10.15%6.1-
64Rolex8.86%4.7-
78Coach7.5-13%4.2$159 M
80Chanel7.26%5.2-
97Prada6.8-6%3.2$213 M

 

(Before anyone points this out, I do realise that maybe the best selling Coach cannot be better than a Prada Tote or Saffiano or Chanel Flap Bag, but these are Forbes figures, not mine)

But the facts show that the biggest brands in the world are family businesses, and it is interesting to investigate what the research on this shows.

Historical research has shown that the best-known brands today started off as family businesses. The Italian or French brands like Louis Vuitton, Gucci, Hermes, to name a few, started off as family brands. In fact, we discuss the downfall of the Gucci family in class at SPJIMR, but the mystique of the brand remains in spite of the brand being held by another family owned company. Their brand and their reputation today still continue to be strong. There are a few brands that have suffered -- Pierre Cardin, Burberry (till recently) who had a downfall -- but these have been more due to mistakes which had diluted the sanctity of these brands.

A recent research study into the drivers of success states four factors for the success of family businesses in the luxury space: 1) Corporate heritage, 2) Long term vision in investment strategy, 3) Specialisation  and 4) Internal and external relationship (Giacosa, 2014).

Let us look into each of these:

1) Corporate heritage: This is the reputation, the heritage of the brand that has been built up over the years, and this is something which needs to be maintained, even when handed over to a new generation or to a new owner. A few years ago, I was listening to a talk by Patrizio di Marco, then CEO of Gucci, who stated that the core values of Gucci were maintained irrespective of their expansion. Their workshop at Florence was still there; it represented the roots of what Gucci stood for.  We see this more commonly in Indian luxury businesses also. I know of another traditional jeweller who has a distinctive touch to his products, such that these are clearly identifiable as his signature designs. Furthermore, the heritage is maintained by the first jeweller, by maintaining the exclusivity and high quality which has been his hallmark for generations. Thus the heritage and brand are maintained by quality, rarity, exclusivity and high prices.

2) Long term vision in investment strategy: This is self explanatory as the family businesses, due to the involvement of the family, have a longer term outlook which translates into their investment decisions. This is in contrast with the relatively shorter term outlook of professionally run businesses. This becomes extremely important in the luxury space as brands are created over a long time, and need constant care by the subsequent generations of family to be relevant to their customers. Burberry’s transformation under Angela Ahrendts is an example of this. Most traditional luxury brands, too, face a similar problem, which has often been the reason for the downfall of most traditional jewellers. For example, most daughters will not prefer to buy from the traditional family jeweller, even though the mother’s comfort factor is high!

3) Specialisation: Family businesses usually operate in niches, using labour intensive sectors, using their specialised knowledge and culture instead of capital intensive sectors where one needs to risk high investments in technological development. Furthermore, there is a lack of capital available, hence self-funding is preferred, which again reduces the ability to make high investments. Hence, over time, these become single brand operations, with a specialisation in a category, which the entire family business is based on. This also causes the entire family to protect the brand and hence reduce the possibilities of brand extensions or product line changes. But expansions, if at all, are under this umbrella brand. E.g. Kerig keeping each brand in its portfolio as a separate identity and not merged under a common umbrella brand.

4) Internal and external relationships:
These become important as the external and internal relationships build “social capital”. The internal relationships are with the non-family members which builds trust and the long lasting relationships. I know of many family firms, where the employees are also second generation employees building the trust and transfer of tacit knowledge within the firms. External relations help in building the brand and the image of the firm which builds the trust and loyalty, which helps in procurement and sales. The traditional firms having a reputation in the region of its origin also helps to build up the mystique, e.g. jewellers from Jaipur, leather goods and clothing from Italy,  perfumes and fashion from France, etc.

These reasons help family businesses in the luxury brand space. But having said this, most Indian brands are not able to maintain the exclusivity of the brand over generations and these suffer due to the factions of the family which cause splits, and the division of the brands. This leads to more confusion in the consumer’s mind, and the goodwill does not build up, thus depriving of the brands their rightful success. But in spite of the shortcomings, family businesses are still the best equipped to be successful in the luxury space.

 

 

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Comments

I completely agree with you sir, What is in a name was once said by Shakespeare but in family business everything is in the name. When we spend 5 times the actual amount of a product we not only pay for the product but pay for the name written on it. It is this name which we proudly flaunt in society. Ownership and more in particular being a family business can be considered a factor of a firm’s symbolic capital in luxury industries. It is difficult for the customers to disconnect with the brand without the family name Selling to a bigger corporation does not mean a formerly privately controlled designer has to compromise on identity. When Phillips-Van Heusen bought Calvin Klein a year ago as a vehicle to help the biggest U.S. shirt maker compete against department stores, industry insiders were skeptical that Klein would be able to keep complete design control over his empire. Finances at one of the world's most recognizable brands were dismal: The designer had reportedly been losing up to $25 million a year on its couture collection and millions more on retail operations. Rather than clamping down on Klein's creativity, Phillips spun the label into two new midrange sportswear lines and pledged to cut costs while keeping Klein's roster of more than 100 designers. Bruce Klatsky, the chairman and chief executive of Phillips-Van Heusen, confirmed that Klein would continue to play an important role in the image-making of the company. Calvin Klein will keep an independent design studio separate from Phillips-Van Heusen, as well as an independent advertising agency to maintain control over Calvin Klein's media image, Klatsky said. This has been possible only because of the name Calvin Klein has made that even after being sold, CK has been able to carry on his name. This justifies the high presence of family firms in a luxury marketplace.

Well said sir. The blog title itself defines the core message. Majorly in the luxury industry the family businesses only lead. It was amazing to note the 4factors that influences the success of a family business. Well, that is the real fact too. Because it is not just simply said, it is a research outcome. But, in our mother India not there are too many success stories as such. In our country the division of the business and eternal damage to any one of the factor is becoming reasons for unsuccessful businesses in this space. For eg : Reliance Energy of Mukesh Ambani & Reliance communications of Anil Ambani, not both the business groups are grown in the same phase. The division that breaks the strength of the family owned business. But, in many family owned business around the world they are successful in their space with potential of family togetherness in business too. The suitable example could be “Wal Mart” .The Walton family owns about half of Walmart through Walton Enterprises. The 50% stake is valuable enough to put five heirs among the wealthiest people in the world. Brothers Rob and Jim Walton sit on the company's Board of Directors, and along with sister Alice and sister-in-law Christy, each have a net worth hovering around $35 billion. Cousins Ann Walton Kroenke and Nancy Walton Laurie are also billionaires from their company shares. Rob Walton's son-in-law Gregory Penner, succeeded him as Walmart's Chairman in 2015. One more factor that affects the business is the lack of heir/successor. Beyond all, In the Luxury industry starting from wrist watches, Fashion accessories, Cars & so on, only the family business leads due to the uniqueness in the Brand Quality, self-satisfaction & the brand value for money to the customers. In the current scenario, the present generation gives more importance to the brands than the value of goods. They feel using such branded things showcase their dignity in society. Hence, most of the heritage business owners are still into the local market without an expansion of their business, even though they possess certain unique handicrafts & quality (eg: Jewels business). Predominantly they feel that, they are getting what they need out of their business and not ready for any more investment. Hope such scenario would change atleast over the coming generations. Until, there exist the present scenario which is all about the family firms that rule the luxury market.

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