Word came last week that Ralph Lauren (NYSE:RL) appointed Valerie Hermann president of its luxury collections, a newly created post at the New York-based fashion powerhouse. She will be responsible for strategy, merchandising, distribution, and overall expansion of the global luxury business, Ralph Lauren said in a press release. Hermann headed up operations at Yves Saint Laurent until 2011, and most recently served as president and CEO of Reed Krakoff.
Going forward, what are Ralph Lauren's opportunities and challenges in the luxury business? More importantly, what will Hermann bring to the table?
The outlook for luxury goods
Research firm Euromonitor remains bullish on the industry's growth prospects. Overall, it anticipates continued momentum in Asia Pacific to boost global spending by more than 35% over the next four years, according to the latest edition of its annual Passport: Luxury Goods report.
Based on Euromonitor's predictions and how fast Asia Pacific is growing, luxury consumption in the region is expected to increase 170% over the five-year period from 2013 to 2018, backed by sturdy demand mostly in India and China.
The Indian luxury market is set to explode with estimates suggesting a better than 80% expansion in constant value terms. The Chinese market is also coming on strong, expected to grow by as much as 72%.
Ralph Lauren's strategy going forward
Looking ahead, Ralph Lauren plans to enhance its luxury accessories portfolio by heavily promoting its Ricky line, among other initiatives. As Chief Financial Officer Christopher Peterson mentioned during the most recent earnings call, the company intends to build upon the tremendous results seen with the banner advertisements for its Soft Ricky high-end handbag. It's introducing three new styles looking for ways to stay up-to-date, and will invest in the product by using higher-quality materials.
While this strategy will enable the fashion giant to further cement its position in the global luxury accessories arena by delivering more value to consumers, it will also push the price a bit higher. That's quite concerning given the fact that, as Euromonitor stressed, "affordable luxury" brands like Coach (NYSE:TPR) and Michael Kors (NYSE:CPRI) are better positioned to cash in on rising demand in both established and emerging markets.
Even so, Ralph Lauren is pinning its hopes on Chinese consumers bolstering its luxury business. It's spending more on advertising, marketing, and PR activity for the opening of the first dual-gender flagship store in China this fall and plans to expand points of distribution in the region.
Increasing brand awareness among Chinese consumers is critical for the company, not only because demand from China is considered to be a key driver of future growth in the industry, but also because the Chinese like to shop while they travel. Peterson pointed out that high-spending tourists from China are in the top five of the company's foreign customers in the U.S. For the most recent quarter, large numbers of Chinese customers were out in force in European stores, as well.
The 'Valerie Hermann' effect
Hermann is the woman for the job. She is a well-regarded executive with an impeccable resume and an impressive track record at some of the big names in the luxury space. She started her career at the Comité Colbert, the Paris-based luxury goods trade association, and went on to work at various positions at Louis Vuitton. She served as CEO of Saint Laurent from 2005 to 2011 before joining Reed Krakoff.
She made a name for herself especially by helping Yves Saint Laurent turn things around and get back in the black. Since Yves Saint Laurent's own retirement from ready-to-wear in 1998, which is usually more profitable than haute couture, the company had struggled to make ends meet. But in three years of calling the shots at the iconic brand, Hermann managed to turn a profit.
The challenges in the ever competitive and enormous American market for someone who has spent her career in Europe should not be overlooked. However, her expertise in the European markets might prove to be exactly what Ralph Lauren needs right now. At 20% of consolidated revenues, Europe remains a significant area of opportunity for the company, both in wholesale and retail channels.
Over the past year or so, macroeconomic headwinds in the region forced Ralph Lauren to pull back on shipments, particularly in the wholesale channel. Going forward, the company intends to make a dynamic comeback, returning to its pre-recession trajectory. Hermann knows how to turn Ralph Lauren's highest-priced offerings into must-haves for European clients.
The "World of Ralph Lauren" includes an array of diversified and more affordable brands – Lauren by Ralph Lauren, Polo Ralph Lauren, and Denim & Supply, to name a few – often causing consumers to lose sight of it as a luxury company. But with Hermann holding the reins of the luxury division, that's about to change. She will undoubtedly bring an added level of fashion and market expertise to servicing the discerning luxury customer.