Differences: The Airport Duty Free Market

Traditional supply chains hardly consider airport outlets as a serious contender in their distribution strategy. However for SCMluxe, its an important point of sale, especially for fragrances, alcohol and tobacco products.  The travel market is defacto a monopoly market with severe restrictions in place - such as quantity and value of goods a customer can carry between countries. Prices are however cheaper than local markets which added with the right ambiance and customer profile (business and first class travellers) makes the airport store an attractive proposition when compared to the flagship high street store for luxury goods.

"Flagship stores can be the symbol of a brand, by way of a boutique, is of utmost importance, as it gives the consumer a glimpse of what the brand is all about and what it stands for" - Joshua Shulman, CEO, Jimmy Choo

We also see that the investment in flagship stores are particularly high with footfalls also being lower. A large investment is necessary in communication and branding to bring the "right" sort of consumers to the store. Another disadvantage is that in emerging economies like India, the lack of a high street inhibits companies from entering these growing markets (Refer Lack of high streets in BRICS ). The airport store is a convenient option in such cases providing the right ambiance for a captive market with assured footfalls.

Narita Airport Store - Japan

To sum up in the words of Michele Norsa, CEO, Salvatore Ferragamo:

" Airports are the shopping destination that brands need to keep an eye on, while they continue to be present in the right hospitality establishments. People in transit have the time and inclination to buy. It's not only indulgent buying but also for gifting purposes. A lot of that happens in airports"

Differences: Merchandising in SCM and SCMluxe

A walk through a big box store or even a high street department store shows up neatly organized products displayed with prices indicated in bold stand out fonts. Clear signage with regard to prices is seen as absolutely imperative in merchandising in traditional SCM for products that a Walmart or a Waitrose would sell. However in the case of luxury products this is very different, products are far and few interspersed with design elements (that are not for sale!) and signage for price of products is very unobtrusive if not invisible. These differences are vital for luxury products where the product and its innate qualities are being sold vis a vis its cost and functional value. Let us look at some of the differences in SCM and SCMluxe in merchandising and distribution

Characteristic	SCM	SCMluxe
Visual Merchandising	Not as important as ensuring easy and efficient access to the products and flow around the store	Extremely important and significant investment is made in store design/window display and location of store.
Distribution	Long distribution chain with wholesalers, distributors, retailers and other channel partners (online sales etc)	Usually exclusive distribution channels if not own brand stores. Internet is not used for sales but mainly for communication purposes only
Customer focus	Not personalized and emphasis on customer comfort	Very customized customer experience needs to be managed in store
Retail time to sale	Short decision making time periods and no effort required to “sell” in store (pick and drop in shopping cart!)	Long decision for sale to happen. Customer needs to be educated on product and may make several visits to retail store before final purchase
Incentivisation of sales staff	Sales commission an important component of incentives for Sales persons	No sales commission to sales persons due to the long sales cycle and aggressive selling that might result from such incentivisation
Promotions	Mostly defined by sales, bargains, clearances etc	Mostly driven by special and exclusive events such as art shows, fashion shows, exclusive charity fundraisers/auctions etc
Cost	Cost of distribution is low and aim is to reduce cost of distribution per sales	Cost of distribution is high due to high personalization required. Metrics generally focus on increased CSat, % of repeat purchases, incremental increase in revenue etc
No. of retail points	Large number of stores or many check out points in big box mega store	Smaller number of retail stores and check out or billing is normally personalized and taken care of by sales person

Differences: Pricing in SCM and SCMluxe

Luxury goods immediately translate to expensive, high priced goods. However simply increasing price on a product does not make it a luxury product – intrinsic value must be built up by quality and brand communications to justify the high price and its admittance into the world of luxury. We have also seen that a strategy of simply increasing price will backfire immediately since entry barriers are low – how long does it take for another company to increase its prices and advertising of such increased prices?

Pricing strategy is therefore an important element of SCMluxe and is very different from the traditional SCM. Let us look at some of the differences in pricing in SCMluxe Vs. traditional SCM

Characteristic of Price	Traditional SCM	SCMluxe
Perception of Price	In absolute quantitative terms ($ per unit or SKU)	More qualitative (world’s most expensive perfume – joy)
Price Elasticity (Coefficient of Elasticity)	Sales are always inversely proportional to price. Hence price has a negative coefficient of elasticity with sales	Sales tends to increase with price as a result of increase in perceived value of the luxury product (called Veblen effect) making the coefficient positive or null in most cases. We see that in some cases when price falls below a threshold value it ceases to be regarded as a luxury product and sales may eventually fall
Price curve over time	Almost always prices need to decrease over time to incorporate better SCM capabilities and to address competition	Price tends to remain stable or increase over time to showcase “timelessness” and increased value from product. SCM capabilities in reducing costs go towards increasing profit margins.
Perceived Value	Notion of perceived value is mostly not applicable	Perceived value is always maintained above actual value by brand communications since the luxury market is geared towards gifting and perceived value plays a very important role
Price Communications	Upfront and directly available either on product or in all communications	Almost never communicated directly. All price communications are couched in terms of the value it creates. Selling if of the product and its timeless value and not on its price
Discounts and Sales	Regular feature needed to clear inventory for new stock	Never resorted to with inventory being destroyed in most cases. Fragrances is one major exception to this rule
Global and local pricing	Large differences due to local market dynamics and cost structures	Typically follows uniform global pricing since the luxury customer is mobile and can shop worldwide. A stark example is from luxury retailers in India who have to bear very high customs duties but still retain prices at global levels by absorbing the costs into their lower profit margins

Thus we see that pricing and its management is not only crucial but also needs to follow a very different approach than one used for traditional industries. Veblen goods or not, luxury goods are unique in not following the herd in matters related to price – as widely seen in the increasing sales and prices of goods from the maisons of Richemont, LVMH, PPR etc. The recent recession is almost non-existent in the annual reports of these companies.