How far can vertical integration go in the Luxury industry?

A few days ago, a company named Italic launched with one promise: selling luxury products made in the very same workshops as those of the most prestigious brands, but without any markup. This means Prada-grade goods but at a twentieth of the price. Touted as a real “direct to consumer” company, Italic is based on a paid membership system (with up to 100,000 would-be customers currently on waiting list) and a rigorous selection of manufacturers.

Though this proposal is fairly disruptive, maisons have little to be afraid of because their products’ appeal goes much farther than their sole build quality — it has a lot to do with intangible factors such as history, style and above all, reputation. However, this should remind us of two things. The first one is that even for century-old, revered maisons, perceived Value can never be taken for granted, especially when high prices are officially justified by high craftsmanship.

The second one is that in the Luxury realm, sub-contractors play a substantial but ambivalent role. On the one hand, they are among brands’ strongest assets, since they house increasingly rare know-how and sought-after materials. Contractors are often the real guardians of Luxury, the ones tasked with executing maisons’ artistic vision with meticulous care.

But on the other hand, they are also Luxury’s weakest link, since they cannot be fully controlled. In Italic’s case, contractors that were not bound by any exclusivity clause agreed to produce brandless goods alongside branded ones, hence shining a light on something everyone knows about but seldom address: hefty margins. Moreover, contractors can sometimes cause scandals about poor working conditions for their employees or fail to comply with quality guidelines, thus disrupting their clients’ value chain.

THE RISE OF VERTICAL INTEGRATION

This ambivalence is why vertical integration has been gaining speed in the last few years in the Luxury industry. First, we saw maisons terminating licensing deals to take back control over accessories business such as eyewear. Then, some industry behemoths secured very specific know-hows, either by acquiring small workshops, which was what Chanel did with Paraffection, or by creating their own vocational schools, such as LVMH’s Institut des Métiers d’Excellence. Finally, Luxury groups such as Kering are now taking back e-commerce in house to preserve their 1st party data and ensure the best consumer experience whatever the sale channel.

Vertical integration offers many benefits. The first one is better value retention, since the brands cuts intermediaries, but also better value creation, because housing every step of production allows for more opacity of costs. The second one is that securing talent and supply reduces reliance on other companies and guarantees a long term presence, which is absolutely vital for maisons. Finally, vertical integration’s total control of the value chain allows for a comprehensive, seamless and 100% Luxury customer experience.

But here, integration primarily focuses on the bottom of the consumer funnel — namely the product per se, the sale and the after-sale. But what if tomorrow maisons started integrating the upper funnel, related to product discovery and consideration?

COULD MAISONS INTEGRATE MEDIA BY BUYING OUT PUBLISHERS?

Actually, after securing product manufacturing and the end experience, Luxury brands could go upstream and secure even more their communications and media. This would particularly make sense now that brand safety is more vital than ever because of the explosion of communication channels, the rise of user generated content and the uncertainties linked to digital media.

Vertical Integration of communications is not new to the Luxury industry. Most of the time, creative assets are made in house under the supervision of each maison’s Creative Director. But taking media in house is something else.

There is currently a growing tendency to internalize media strategy and buying. Though it seems wise, with better control and lower costs in the short term, I think those benefits will wane in the mid to long term because internalizing consulting means less objectivity. (disclaimer: I work for media agencies)

However, the real question when it comes to integrating media is: could luxury maisons push the integration of communications even further by buying out publishers, especially in the press?

It might sound crazy but consider this: the press sector is not in good shape, with advertising revenues steadily shrinking by 5–7% per year until 2020, and its largest players are forced to reorganize. For most industries, this would be a non-issue. But for the Luxury industry, it could be deadly in the long run as the relationship between media and Luxury is two-way, very intense and built over decades. More than any other industries, Luxury needs media to survive symbolically — as it remains the most powerful lever of brand building and PR — while media needs Luxury to survive economically. Therefore, acquiring publishers, or at least becoming one of their major shareholders, would be killing two birds with one stone: saving the media they need to exist and integrating it better into their communications efforts, for a truly end-to-end experience.

If you think about it, the integration phenomenon has been in the making for years. Luxury behemoths have heavily invested in owned media such as content platforms, patronage and branded exhibitions. So it’s about time major Luxury groups invest directly into media groups.

RETHINKING THE CONTRACT BETWEEN THE PRESS, BRANDS, READERS AND CONSUMERS

Of course, such an approach would be highly controversial. Handing over the power of media to companies featured in the very same media could undermine the very basis of journalism. However, the press’ independence is even more at risk when it is cash-strapped and forced to sell out by producing cheap content to capture more eyeballs while seeing its advertising revenues hopelessly dwindle because of the likes of Facebook and Google.

Welcoming Luxury groups as shareholders would mean recognizing the special bond between media and Luxury and providing the media with a stable backing so that it can keep on transforming. But beyond that, it could be the perfect occasion to rethink the contract between journalists, brands, readers and consumers. Actually, Luxury groups could join forces to support the media all together, so that no media depends from a single company. One could push this philosophy of checks and balances even further by creating shared and standalone investment bodies to guarantee their full independence.

Right now, the relationship between media and Luxury is very deep but the former’s independence remains partial because regulation is only informal and money is scarce. Tomorrow, regulation could be much stronger and the relationship even deeper. Time will tell how far — or how high — vertical integration could go in the Luxury industry.