Q&A: A Social Approach for Luxe Brands

SAN FRANSICO Milton Pedraza is the CEO of the four-year-old Luxury Institute, a marketing research organization focusing on wealthy consumers.

Pedraza, 49, sees luxury brands being roiled by changes in their audience of ultra-wealthy customers and do-it-yourself multi-millionaires. He says that instead of being collectors as their parents were, the new tech-savvy generation of luxury customers prefers convenience and being part of a community. For them, interesting life experiences and sophisticated service matter more than pride of ownership, he says. It’s a shift that may be a shock to many high-end brands.

What is the future for the luxury sector?
Throughout luxurydom the people who built the grand luxury companies have begun to retire, to sell and to move into philanthropy, passing the baton to the new generation. But it seems like most of the new leaders don’t yet understand that they can’t replicate the old models. Technology, globalization and commoditization are transforming their world. At luxury conferences I hear the same old messages and tired strategies, with debate about whether or not to sell to the masses or on the Internet. Then when I go to a Silicon Valley conference I see that the luxury industry lives in another galaxy, detached from consumers who have already moved beyond Web 2.0. I think we’ll eventually see some innovative luxury leaders emerge from the chaos.

How is the role of service changing for expensive brands?
Typical concierge-type offerings have become mundane. Many credit card companies help with getting restaurant reservations and tickets for the theater or sporting events. Wealthy consumers are looking for a higher level of professional assistance than that. They need trusted help finding a reliable art dealer, accountant or wealth advisor. Or knowledgeable assistance in planning a wedding or chartering a jet. They want project managers, such as they have in their work life, but they want them for their personal needs, for managing their lifestyle.

Can luxury brands add these lifestyle management services to retain their customers?
It isn’t that direct. The people providing the lifestyle services can’t be seen as lackeys of any brand. For instance, the Luxury Institute is talking to American Express about helping its high-end customers find independent [lifestyle] consultant services. And AmEx customers would get a reduced rate for the consulting services. But the consultants have to be objective; they can’t be seen as steering clients to the suppliers that AmEx has a relationship with. The brand’s role is to introduce and refer customers to these consultants, who operate separately. Financial services companies, such as private banks, are a good fit for such a referral service. They could say, “We do your wealth management and we’ll help you find the right people for your lifestyle management.”

Are high-end consumers less interested in owning luxury cars, homes and products than they used to be?
They still want to use those things, but they often don’t want to own them. They want to have access to luxury experiences without the hassles of ownership. We call it the luxury access revolution. Jets, yachts, vacation homes, autos, vineyards, golf clubs, even typically less pricey items such as handbags, jewelry and watches are embracing a membership model in which customers pay to use the product for a fixed period of time. It’s not really a way to save money, because the memberships are quite expensive, but customers can enjoy more variety and convenience and they don’t have the depreciation risks. These consumers are luxury enthusiasts rather than collectors or connoisseurs. Let’s say you are a car lover. Where are you going to store all your cars? Your town won’t let you build 15 garages, but keeping your cars at a car club is a hassle. Plus you don’t have time to drive each car more than 1,000 miles a year. So you belong to a car program and you can drive the newest models and enjoy a bigger variety of cars.

What are some examples of this membership trend of renting rather than owning things?
Exclusive Resorts for vacation homes and Bag Borrow or Steal for designer handbags and jewelry. The idea is similar to the Netflix model where you pay by the month and get access to a variety of movies. Your membership also puts you in a community of like-minded enthusiasts, which some people see as more fun than being an individual owner.

Is it easy for luxury marketers to embrace the notion of a community of consumers?
Frankly no. Like in other categories, the Net is making everything transparent, and communities are forming around brands with or without the marketers’ involvement. Before this transparency, marketers would just say to consumers, “This is my offering.” Or in the case of many luxury companies, they used to say, “This is my offering and you can’t have it.” Now the brands can’t control or censor the conversation about their products. They can participate, listen or ignore it. Some brands might be able to maintain their exclusivity by not caring or dealing with the consumer community, but our research at the Luxury Institute says that will be rare. The best luxury brands will create a community of fans, listen to the good, the bad and the ugly, and then act on what they hear, co-creating products that their customers desire. That process will be extremely hard for many luxury brands to do and we expect more than a few to wither into irrelevance.

Does your institute have a handle on its own community of luxury brands and consumers?
I am still trying to understand our community. I regularly search the Web for comments about my blog or our organization and I find people saying things like, “a Luxury Institute? That’s ridiculous.” I can choose to respond or not. Institute research has found 15-20 percent of wealthy consumers create content on the Web. To tap that trend, the institute is launching a paid global membership club for wealthy individuals. The club offers independent ratings and peer-to-peer ratings and reviews of products, such as designer clothes, and of service providers, such as accountants and wealth managers. We think luxury consumers in Dubai can advise those in Thailand and the U.S. and vice versa.

How much would it cost to belong to this luxury ratings club?
It costs $995 a year. We are looking for members with a net worth of more than $3 million.

How about the trend of luxury brands moving into affordable luxury product lines?
Affordable luxury is a contradiction in terms. Those luxury brands racing to transform themselves into affordable luxury by making deals with mass retailers have forgotten that their business model is not just about stamping out more products. Has anyone noticed that part of the experience of a luxury brand, such as Armani or Gucci, is great, over-the-top, personalized service? Just walk into any mass retailer and indulge yourself in the service levels they provide. That may not be the service level the luxury marketer wants its brand name to be associated with. In a transparent world, consumers will share and rate those retail experiences and define your brand for you. Look for some luxury brands to get out of mass retailers in a hurry, albeit not with their reputations intact.