Retail Performance Management in the Luxury Industry

Table of Contents

List of abbreviations

List of figures and tables

1 Introduction
1.1 Problem Definition and Objective
1.2 Course of the Investigation

2 Theoretical Foundations
2.1 Conceptualizing Retail Performance Management
2.1.1 Two Main Guidelines of Enhancing Performance
2.1.2 Target Values and Key Figures
2.1.3 Performance Pyramid
2.1.4 Balanced Scorecard - A Management Instrument
2.2 Concepts of Luxury
2.2.1 Definition of Luxury
2.2.2 Features of Luxury brands

3 Changes in the Luxury Retail Industry
3.1 Recent Economic Developments in the Luxury Industry
3.2 Changes on the Demand Side
3.2.1 Purchasing Power’s Impact on the Luxury Industry
3.2.2 Customer Needs
3.2.3 Shopping Behaviour
3.2.4 The Neo-Wilde Consumer
3.3 Changes on the Supply Side
3.3.1 Flagship Stores
3.3.2 Multi-brand Stores
3.3.3 Online Shops

4 Transferability of Retail Performance Management into Luxury Fashion
4.1 Product Quality & Availability
4.1.1 Sustainability
4.1.2 Logistics: Supply Chain Management
4.1.3 Logistics: Ordering
4.1.4 Distribution Channels & Target Group
4.2 Sales Personnel & Service
4.3 Shopping Experience & Store Policy
4.4 Practical Application of Retail Performance Management

5 Conclusion

Reference List

Appendix A - Graphs

Appendix B - Interviews

List of abbreviations

illustration not visible in this excerpt

List of Figures and Tables

Figure 1: Target Values

Figure 2: Performance Pyramid

Figure 3: Balanced Scorecard (BSC)

Figure 4: EBIT Growth Luxury Companies

Figure 5: Distribution Channels

Figure 6: Balanced Scorecard for Luxury Industry

Figure 7: GDP Development

Figure 8: Saks EBIT growth (in %)

Figure 9: Maslow’s Hierarchy of Needs

1 Introduction

1.1 Problem Definition and Objective

‘‘Consumers everywhere at every income level want more luxury’’ (Danziger, 2005, p. xii). In order to supply customers with the growing demand of luxury, luxury retail is gaining importance on a global scale. One result of this increasing popularity of luxury goods is that more and more new luxury companies and retailers enter the global market and thus render it more competitive. Additionally, the financial crisis has struck many luxury companies and retailers that thought themselves safe from market and demand fluctuation very hard - pushing some to the verge of bankruptcy.

All these factors combined have increased the necessity to make use of resources as wisely as possible and to control costs and investments. Therefore, it seems useful to introduce the concept of performance management into the process into the company’s controlling framework, which is part of controlling, to luxury fashion. Generally, performance management is unprecedented in the world of luxury, since the mere combination of the words “retail performance management in the luxury industry” seems paradox. Luxury defines itself by presenting a perfect, inspiring, refined, and affluent brand experience and an exciting shopping-experience in a world where money does not play a, which does not seem to be compatible with cutting costs (Chevalier & Gerard, 2008).

Despite being an established part in companies around the world and taking a distinguished place in applied economics, performance management only appears in a very limited number of literature concerning retailing, and practically none concerning luxury fashion retailing (Mattmüller & Tunder, 2004, p. 236). It is therefore due to the research gap and data as well as literature deficiencies that it was preferred to work with traditional performance management tools, such as the Balanced Scorecard (BSC) and the Performance Pyramid (PP) that make use of target values, and to adjust them to suit the luxury retail industry business. Furthermore, A categorization of performance management tailored to this sector was developed in the course of this thesis, sourcing from LVMH’s practice, Meffert, and Kaplan and Norton, amongst others.

A limitation of the study is the inconsistent quality and scope of recent market data about consumption in the luxury sector, probably due to the loose and constantly varying definition of the term luxury. This problem was overcome by focusing on the changes of the gross domestic product (GDP) and retail purchases over time and drawing own conclusions.

Moreover, the task of this thesis is to analyse and develop business models for measuring luxury retail performance. However, for doing so the whole market segment of luxury goods defined in Chapter 1 must be taken into account, which lead to the inclusion of a rather macro-economic analysis and explanations of the recent status-quo of the whole industry of luxury goods, either being sold by their producers themselves or distributed via luxury department stores.

The main focus of this thesis, however, will lie on performance management tools from the business economic point of view and since the standardisation of global markets has long ago reached the luxury industry, those are globally applicable (Pilnick, 2010). In order to be able to explore and finally prove this global trend, one global jewellery business operating from New York was chosen: Tiffany & Co. The two chosen luxury department stores were firstly Eickhoff in Duesseldorf, and secondly Saks Fifth Avenue, situated in and operating from New York. Choosing these interview partners enabled an exploration of completely separate customer bases, one in Germany and one in America, but also to determine whether trends are global in retail performance management and purchasing behaviour patterns. It can thus be stated that the future outlook derived from the findings were globally applicable or whether there were still enormous discrepancies to overcome. This thesis’ research questions therefore breaks down to be:

To what extent can retail performance management be applied to the luxury fashion industry in terms of up- and down scaling?

1.2 Course of the Investigation

In the first Chapter, the introduction, including the problem definition and objective, as well as the course of investigation, clarifies the path and the purpose of this thesis, as well as explaining the decisions of research methods and case studies.

Chapter 2 begins with the explanation of different approaches to conceptualizing retail performance management (RPM), featuring the two main guidelines of enhancing retail performance developed in Chapter 2.1.1, as well as target values, the PP and the BSC. The different concepts’ purpose and units are visually and verbally explained with models adapted from expert authors in the respective fields. The second half of this Chapter is dedicated to the definition of luxury and the scope of this study, well as to the concepts of luxury.

This consequently leads to the next chapter, which explores the changes in the luxury retail industry differentiated by changes on the demand side and changes on the supply side. The first part observes recent trends in shopping behaviour and customer needs, featuring Masow’s hierarchy of needs (Figure 10). All topics are explained and analyzed theoretically and practically after general economic trends have been explained regarding major luxury brands’ stock prices and GDP. Thereafter, changes on the supply side are observed and explained. This firstly requires the observation and distinction of flagship stores, multi-brand stores, and online shops, as well as the changes recently occurred and predicted trends.

Chapter four combines the presented performance management tools with the changes in the luxury retail industry to develop and prove hypotheses about the transferability of retail performance management into luxury fashion. This is achieved by combining knowledge and experience of the interview partners with theoretical foundations stated earlier in the thesis. Hence, the focus lies on product quality and availability, service, and shopping experience, which are the features analyzed when regarding performance management.

The findings and implications are summarized in the fifth chapter and a future outlook will be derived. a summary of the preceding chapters, discovered limitations of the study, and a future outlook are contained in the conclusion.

2 Theoretical Foundations

2.1 Conceptualizing Retail Performance Management

Since measuring the performance in the luxury industry by ratios like Revenue/Area or Revenue/Sales Personnel would not make sense, other target values and key figures are required (Mattmüller & Tunder, 2004).

The idea of corporate performance management (CPM) emerged from the necessity of not having to rely merely on ex-post financial key values for the purpose of leading a company and developing new strategies, but also to involve ex-ante and non-financial information. The performance pyramid, introduced by Lynch and Cross (1991), as well as the Balanced Scorecard, developed by Kaplan and Norton (2001) at roughly the same time, quickly established themselves as the two main pillars of CPM as it is known today. Both concepts are used nowadays to develop and improve a company’s strategy by analysing both ex post and ex ante key figures, focusing on both financial and non- financial information (Kaplan & Norton, 2001). Both concepts contain target values and key figures as illustrated below.

Performance management is a part of brand controlling, which is a part of brand management. Brand controlling has the task of delivering a well-founded and targetoriented operations research, in order to ensure the maintenance and steady improvement of the ability of the brand politics to react and adapt to occurring changes in the environment. It therefore indirectly affects the optimization of the brand and resulting from this the success of the company (Meffert & Koers, 2008).

Performance management from the retail perspective can be defined as a comprehensive system combining the individual performance of employees, customer service, products or product groups, and different methods of logistics with a set of systems applied within a retail company, leading to a constant and long-lasting achievement of the company’s maximum performance (Nair, 2004). This methodology entails assessing the performance, analysing the requirements of stakeholders and shareholders, performance planning, performance improvement, and its measurement and evaluation (Klingenbiel, 1999, p.16).

In the course of this chapter, means to measure a brand’s performance will be introduced and analyzed, such as key figures and target values, as well as concepts used for corporate performance management, like the PP and the BSC, all of these being adjusted to the luxury retail industry’s features. All presented concepts below can be applicable to retailers, as well as to luxury companies themselves.

2.1.1 Two Main Guidelines of Enhancing Performance

All factors used to improve performance in the luxury retail industry, which are described in the following chapters, can be divided into two simple key concepts that luxury companies and retailers pursue. The first principle is downscaling, usually done by cost cutting and downscaling the company, which could entail closing stores, decreasing orders or produce, and others. It is a popular mean for companies in times of economic hardship to avoid bankruptcy (Ferreira & Otley, 2009). The second principle is up scaling, which entails expansion and investment in order to improve product and quality. Every measure described in the following management tools, used to achieve target values and implement new strategies, can be broken down to serve either the purpose of downscaling by cost cutting, or upscaling by investing, as well as combinations of the two. Combining the first main guideline of cost cutting with the focus on product quality, service and staff, shopping experience, and logistics, the following possibilities arise to reduce costs:

- In products by using cheaper raw materials, labour, and packaging
- In service by employing less sales staff, scaling down customer service and saving on customer retention management,
- In the customer’s shopping experience by decreasing store sizes, reducing lavish interior design, aiming at more sales/m², decreasing marketing and publicity
- In logistics by making supply chain management more efficient, reducing shipping costs, re-order costs, and the ration of returns
- Downscaling distribution channels by closing down flagship stores and limiting distribution in multi-brand stores

The second guideline becoming increasingly popular in the luxury retail industry is to move a step forward and invest. This can be achieved by:

- Investing in the products’ quality by maintaining or improving high standards
- Investing in service by expanding on sales staff training and customer retention management
- Investing in the customer’s shopping experience by creating innovative, spacious, and extravagant store design, intensifying marketing and publicity
- Investing in logistics by shortening delivery periods and thus reduce customer’s waiting times
- Investing in distribution channels by opening more flagship stores and delivering to more retailers, or opening internet shops (LVMH Group, 2009) (Kaplan & Norton, 2001)

The following methodologies explore and link these methods further.

2.1.2 Target Values and Key Figures

Target value analysis is used in the process of performance management and measurement within brand controlling. As a starting point of all brand controlling- related performance management, target values need to be defined and formulated prior to the obtainment of actual values, called key figures, which are then compared to the desired target. According to Meffert (2008), the method of target values entails few but basic influencing factors that are vital for the success or the failure of a brand.

The use of key and target values as a measure of success has significantly changed over the last years. Traditionally they were only used as a means to grasp quantitative data and to reduce their complexity so that they could be more simply analysed (Reichmann, 1976). The most famous and accredited system for key figures is the DuPont System, which focuses mainly on the status-quo of financial assets and liquidity, using the return on investment (ROI), and will therefore not be analysed further in this thesis. Nowadays it is still mainly used for quantitative data, which leads to a rather high aggregation of information, for which it is commonly criticised. Pundits claim that other relevant factors for the performance, such as processes and employees are not sufficiently considered in this methodology (Gleich, 2001, p. 8). In Figure 1, however, an effort is made to depict also more qualitative issues that are crucial for the performance management.

In the following, it needs to be determined which factors influence a brand’s success and that can therefore serve as a steering element for performance management (Hammann, 2001). One has, however, to be careful to choose appropriate key figures that serve the purpose of generating dense information (Botta, 1997). While choosing the relevant factors, it is crucial not to limit the selection to single measures of success but to combine several indicators to form an integrated index of success at its top, which is called the success index or top value (Tolle & Steffenhagen, 1994). This top value represents the brand value, and as shown in Figure 1, can be split into the two value indicators brand strength and economic brand value. It can be derived from the figure below how the brand value is assembled from two different sets of target values: the pre-economic target values, which sum up to brand strength, and the economic target values that accrue to the economic brand value. While the economic brand value can easily be calculated, containing only quantitative figures, the brand strength is rather qualitative, since it involves psychographic values that can hardly be measured with numbers.

Figure 1: Target Values.

illustration not visible in this excerpt

Source: Adapted from (Meffert & Koers, 2008).

Thus, the brand strength represents the brand value from a customer’s perspective and its building blocks such as brand image, brand awareness, brand familiarity and customer satisfaction act as pre-conditions for the development of the economic brand value (Faquhar, 1990). Psychographic brand values are commonly used in marketing to determine and directly cater for exact target groups. Psychographic target values such as a positive brand image and customer satisfaction can be reached by offering high- quality products that meet the needs and expectations of customers willing to pay premium prices, as well as immaculate pre- and after-sales services, such as well- educated sales staff, personal shopping, tailoring, warranties, and repair services. All these factors are also part of customer retention management (CRM), which also involves creating sale events, holding private sales, publishing catalogues and newsletters. CRM is crucial to maintain a base of loyal and free-spending customers, especially in times of economic crisis. The customers’ perception of the brand is seen as a source of economic brand value and their rational and emotional associations and conceptions vis-à-vis the brand influence their appreciation. Hence, only when customers have developed memory structures entailing the brand and its products, can economic value be generated for the retail company (Meffert & Koers, 2008). As can be determined from Figure 1, the successful obtainment of the psychographic target values will increase brand loyalty, which is measured in the consumers’ commitment to continue using and repurchasing the brand. It also supports the word of mouth advertising potential of a brand (Gremler & Brown, 1999; Chevalier & Gerard, 2008).

A high brand loyalty, hence a higher attractiveness of the brand to the costumer, leads to an increase in the price a customer is willing to pay for the product (price premium), as well as in the amount of items sold (mass premium), and those two add up to higher sales. Since the production costs per item do supposedly not increase with higher sales, the brand perception will have a direct influence on the return and thus the brand and company value. Constantly improving the brand strength by bringing the psychographic brand values to perfection is therefore a necessity in the process of maintaining and improving the brand value.

This thesis will mainly focus on how to minimize costs in production, logistics and service, augment sales, as well as to create brand strength by raising customer satisfaction. Furthermore, it will aim at combining these targets in the two concepts of the PP and the BSC. The figure presented here is mainly applicable for a brand sold at an owner-operated flagship store.

2.1.3 Performance Pyramid

In 1991, Lynch and Cross published their concept of the performance pyramid, aiming at permanently improving a company’s performance. This conception differentiates itself from traditional performance measurement models in two central features. Firstly, it involves non-monetary units when measuring a company’s success and leading new strategy implementations. Secondly, an equal consideration of the customers’ and the finance perspective is included, whereas traditionally the focus on finance strongly outweighed the rest (Busco, Giovannoni, & Scapens, 2008; Nilson & Kald, 2002; Hannig, 2007). The PP was developed with a close reference to the practical, specialized for certain exact levels of organization (Lynch & Cross, 1995, p. 65).

The pyramid’s top represents the company’s vision, which has to be communicated throughout all the steps of the hierarchy levels in the pyramid. Together with the second level it forms the organizational level, where it is mandatory that the market and finance perspectives be taken into account when formulating goals, breaking down the strategy for each single unit and implementing it.

The third level depicts the processes necessary for the implementation of the company’s strategy. Customer satisfaction - resulting customer retention, loyalty, and hence brand strength as a target value - lies in the main focus, as well as flexibility to react on recent trends on the retail market, and productivity. Operative target values, for instance the introduction of a new product, are used here.

The basis of the pyramid is composed of the level of departments and different teams where the particular goals are defined in terms of quality of the products, delivery speed and availability, cycle time (for instance the turnover of the stock), and activities with no added value, which have to be diminished as far as possible.

The separation into the market- and finance-oriented section depicts the equal importance of both stakeholder groups customers and investors, as opposed to only financially focused performance management tools such as the DuPont method, which will not be analyzed further.

Figure 2: Performance Pyramid

illustration not visible in this excerpt

Source: Adapted from (Lynch & Cross, 1995)

Furthermore, the pyramid can be divided vertically into an external and internal point of view. The market-oriented measures help improve the external effectiveness, whereas the process-oriented performance indicators raise the internal efficiency and thus lower costs. The challenge is to break down the goals top down and to develop the key performance indicators bottom up, as depicted in Figure 2. Since the market-oriented key values and measures in the external perspective include numerous qualitative indicators such as customer satisfaction, which cultivates customer loyalty and retention, are vital for luxury brands and luxury retailers, the focus will rather lie on this indicator, as well as on the product quality and the company’s flexibility to adapt to changes in the economy, customers’ shopping behaviour and fashion trends. Important factors in the internal, prevalently quantitative view are cycle time (e.g., turnover rate of stock) and cutting unnecessary costs, summarized in the section productivity.

These processes support the accomplishment of the company vision within the implementation of new strategies. Compared to the following concept of the BSC, the PP features several similarities, for instance the focus on the customer’s and investor’s point of view, and the productivity, which could be compared to the BSC’s international business perspective. Furthermore, the fourth level has similar tasks and target values as the innovation and learning perspective (Lynch & Cross, 1995).

2.1.4 Balanced Scorecard - A Management Instrument

Compared to the PP, the BSC is highly more complex, containing the double amount of different perspectives. The developers of the BSC, Kaplan & Norton (1992) understand it as a management system combining financial and not-financial figures with a relation to strategy and success potential, which are crucial factors of performance management (Kaplan & Norton, 2001).

Within the last years, the BSC has been proven to be suitable for companies of any size and legal organizational structure. It is an efficient instrument to measure, track and depict strategies in a transparent and well-balanced way (Jazayeria & Scapens, 2008; Wiersma, 2009). The BSC concept facilitates a structured strategy discussion during the strategy determination phase. Clear goals, indicators and measures enable the strategy to be made extremely concrete, while strategic instabilities and a unilateral focus only on finances are avoided. Measures and figures make the strategy controlling quantifiable, and thus the BSC exceeds a simple key figure system in its performance and variety (Horváth & Gaiser, 2000; Horváth, 2006). It provides an increase in the chance of implementing planned strategies and appropriately examines the value enhancement potential of a company. Therefore, it is a formidable tool for converting strategies into action (Nair, 2004).

The use of the BSC is not expected to contribute to the creative process of developing new company strategies in the actual phase of finding one; it is, however, employed to support the implementation phase of the strategy when a project for the strategic renewal is initiated (Gladen, 2005). Various other motives for designing and introducing a Balanced Scorecard are the following, according to a study by Horváth and Partners (2004): (a) enhancement of management through goals, (b) relativity of the preliminary financial figures, (c) simplify the operational planning process, (d) improvement of external and internal reporting, (e) purpose of regulation.

These factors clearly prove that the BSC is not a mere key figure system, but a management system, since it is used as a means for the decentralisation of the strategic work (Horváth, 1999).

The BSC can have numerous different perspectives, depending on the company’s core business and values. Primarily, the BSC is designed for the managers and to deliver them all the success factors critical for the obtainment of their strategic goals in the form of key figures. In order to draw the attention onto the most important factors and not to lose focus in large reports it is possible to reduce the number of key figures and to combine several of them in groups, as seen in Figure 2. This grouping is achieved by Kaplan & Norton (1992) by dividing these key figures into four perspectives, as Figure 3 proves. With the following figure as a basis for the chosen strategic key figures, the BSC can be created from the perspectives of: (a) the formal business goal (international business perspective), (b) the financial goals in terms of the shareholders, (c) the customer-oriented goals, (d) and the internal goals of innovation and learning.

This thesis will not focus primarily on the financial perspective, but mainly on the customer perspective, involving the luxury brand with its product’s quality, customer retention programmes and the luxury brand’s and retailer’s perception by the customer. In Chapter 4, a BSC created for a luxury company will be introduced.

The international business perspective and thereof arising questions are as follows: “Are we working effectively and efficiently?” whose analysis can be simplified using the PP. “How can we continue to improve and create value?” is a question that every company has to ask itself; and “What must we excel at?” is also crucial for luxury companies’ performance, since they have to constantly be oriented at the latest trends and maintain their brand equity high enough to justify premium prices. The three questions about customers: “How can we serve customers better in the future?”, “How do customers see us?” and “Are we satisfying customers’ needs?” are also vital and have to be reconsidered regularly to maintain the company’s service and spirit at the fashion pulse and recent zeitgeist, as well as to adjust to changes in the luxury retail industry, as analyzed in Chapter 3.

Figure 3 shows a theoretical example of a luxury retail company. It could therefore serve either a luxury brand selling at mono-brand stores or a luxury multi-brand store.

Figure 3: Balanced Scorecard (BSC)

illustration not visible in this excerpt

Source: based on (Gladen, 2005; Kaplan & Norton, 2001, pp. 71 - 79)

2.2 Concepts of Luxury

2.2.1 Definition of Luxury

Coco Chanel’s view on the term luxury is best represented by her two most famous quotations: (a) “Luxury must be comfortable, otherwise it is not luxury.”, and (b) “Luxury lies not in richness and ornateness but in the absence of vulgarity.” (Chanel & Morand, 2009). With these quotations coming from the founder of one of the most luxurious fashion houses in the world, which just introduced today’s way of wearing crowns in its Paris-Moscou collection; her definitions seem very immaterialist and modest.

In fact, a general consensus about the exact definition of luxury is still to obtain, since it depends on the sociological background, the economic and political situation, as well as the time that the contemplators creating the definition, find themselves in (Lasslop, 2002).

To find a definition for the word luxury, an ethymological explanation will lead close to its traditional core. “The concept of ‘‘luxury’’ traces its roots back to the history of the great civilizations of the ancient world: luxury goods have always been associated to wealth, exclusivity and power, as long as it was identified with satisfaction of non-basic necessities” (Brun, et al., 2008). The term ‘‘luxury’’ roots in the Latin word ‘‘luxus’’, which means ‘‘soft or extravagant living, sumptuousness, opulence’’ (Dubois, Czellar, & Laurent, 2005) or from the Latin ‘‘luxuria’’, which means ‘‘excess’’ or ‘‘extras of life’’ (Danziger, 2005).

Coco Chanel’s attitude towards it can best be described with the behaviour-related approach to luxury, which emerged in the 17th and 18th century and assigns a high complexity to it, exceeding the indispensable to life, the socially appropriate or the “normal” living standard (Wyrwa, 2003; Brun, et al., 2008). In 1772, Denis Diderot, a French novelist, defined luxury in an encyclopaedia as “the use of wealth and business to create an enjoyable life for oneself”, a very suitable and timeless definition, still applicable today (Wyrwa, 2003; Sicard, 2003). The behaviour-oriented definition serves for the discussion of patterns in consumption, cultivated for example in Maslow’s Hierarchy of Needs (Lasslop, 2002; Maslow, 1993), which will be explained more precisely in the next chapter.

On the one hand, the economic approach explains a relation of price to quality lying above the average of the market. From an economic point of view, luxury is defined as being object-oriented and used for the classification of goods and brands. In this context the term luxury is used for goods that are not directly necessary for the consumer, opposed to products that cater everyday needs (Bearden & Etzel, 1982). The features that can be assigned to most luxury goods in every product category are the less automated production, smaller production volumes, higher quality, and a higher price level of the product groups. More factors playing into the description of luxury goods are their relative scarceness, opposed to the affluence of needs that everyone possesses (Lasslop, 2002). “By definition, necessities are possessed by naturally everyone, while luxuries have a degree of exclusivity” (Bearden & Etzel, 1982, p. 184).

In this thesis, the research and analysis will be focused on luxury clothing and accessories, as well as jewellery and fine jewellery.

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