Faculty of Business Management

Economics Analysis (ECO 740)

Case study analysis Luxury Goods: No sign of slowing

Prepared By:

Mohd Hamirul Bin Mohd Puad

2011355359

Lecturer Dr. Azlina Hanif

Case Study Analysis. Economics Analaysis Luxury Goods: No sign of slowing Discussion

a).

The sales of luxury goods was seen not to slow down as it is found that the sales for

that goods for a couple of top-ended manufacturer, Richemont and Tods sales increased by 29 percent and 14 percent respectively in the first nine months of 2011. Even when a disaster struck Japan, Richmemont luxury industrys number two market, increased 9 percent. It can be concluded that the demand for luxury goods has shown significance increase from those figures. Luxury goods is a product that is known for its price, the higher the price the more perception on the goods as the luxury. It is also found that the mainland China has contributed to the sales chargers due to the increasing number of wealthy consumer in China. In addition the double digit revenue growth of US indicates that the factor for the sales of luxury goods is not going to slow down is due the increase in income of the consumer. Even when disaster struck Japan, the demand did not seem to fall even stocked up the Richemonts sale up to 9 percent indicates that the consumer income must be affecting affordability to the sales of luxury goods.

b).

Equilibrium price and quantity of a product is at the intersection of the consumer

demand and producer supply. If the price for a certain good is below the equilibrium, it means the new supply is less than the demand. Vice versa, if the price is above the equilibrium, this mean there is a surplus of the good.

Figure 1 Intersection of supply and demand curves

In case for Richemont and Tods luxury goods, it could be concluded that the demand for the goods rises. The change in market equilibrium can be explained from the demand curve shift from the initial equilibrium to the new equilibrium.

Figure 2 Right-ward shift in demand increases

For most price and quantity demand curve it shows that the increase in price will reduce the quantity demand. However in market equilibrium the relation can be made from the supply curve and demand curve. When the quantity of goods that people purchase or consumes increase at a given price; it is said to be as an increase in demand. The increase in demand is shown from figure 2 above where the demand function shift outward from D1 to D2, thus the equilibrium price raises from P1 to P2 along with the quantity of demand from Q1 to Q2. For normal law of demand where the higher price will cause the demand become less, this case would violate the law when price raises from P1 to P2 should reduce the demand quantity, however instead happen when demand increase from Q1 to Q2. Thus, it could be said that the might be other factors that contribute the change in demand from curve D1 to D2. The increase in demand could come from various factors such as the taste, incomes, product information, fashion and many more. Thus for luxury products the demand might be affected by the income elasticity. The elasticity of income is believed to have made the demand to be insensitive to the change in price.

c)

The standard law of demand is normally stated as an inverse relation of the quantity

demanded and price, in other words as the price increase then the less will the consumer demand. However for this case where the sales of luxury goods show no sign of slowing down, as the price rises the consumer will still consume or purchase the products. In economics, such situation is explained by relating the goods as Giffen goods, where people will consume or purchase more even if the price rises. Price relation to the demand can be related with the price elasticity. For most products the price elasticity will have negative value since the relation of price increase change will give a decrease change in quantity demand and vice versa thus give us the negative value. Violating the law of demands, the luxuries goods have made the perception for a product to be improved as the price is raised, thinking the quality of the product improved contribute to the demand for products to increase thus, the change in price and change in quantity will have positive value since if the price goes up, the demand will also go up. The main factor for the luxury good's elasticity is the elasticity of income. Luxury good is a good for which demand increases more than proportionally as income rises. Luxury goods are said to have high income elasticity of demand. As for this case the double digit US revenue growth and the wealthy Chinese has contributed to the income elasticity and sales demand. The income elasticity relation is described by the following equation.

EY

% change in quantity demanded % change in real income

If the income elasticity Ey is higher than one, the demand for the item is considered to have high income elasticity. If Ey is less than one, demand is considered to be inelastic. Luxury items usually have higher income elasticity because when people have a higher income, they don't have to lose as much to buy these luxury items. Since income is a factor of

demand elasticity, thus if there is an increase in price and increase income, there will be an inelastic reaction in demand, hence demand will be insensitive to a price change if there are changes in income and people will consume or still purchase luxury goods.

d)

Competitive strategy refers to on how a company should compete in a particular

industry. A good competitive strategy for a company should make the company to gain advantage through a distinctive way of competing. In order for Richemont to sustain its profitability in the luxury goods market, the company should consider current trend and technologies as a path for good competitive strategy. Few years ago, luxury brands have been hesitant to move online, now along with evolving technologies, the print advertising shows a decreased return and the increased internet advertising has become a must. It is roughly about 90% of high-income internet users will regularly shop online thus putting the goods online is one way of good way in sustaining the profitability. Another factor that affects the demand other than income is the product information, there will be many other third party product information including the competitor product information thus since many online consumers will do their research online, Richemont should ensure that their products have their descriptive information presence online. In other words Richemont company should consider using information technology strategy in order to stay competitive. Another strategy to sustain its profitability is by using product differentiation strategy. Since the company is a luxury goods manufacturer; the brand competition is a must in order to distinguish from the other luxury goods manufacturer and ensuring that the other competitor product will not become as a substitute. For an example a value of cultural taste could be considered in the product design to distinguish with other products. Richemont should also consider a large promotional and advertising campaigns to stress distinction among other products. Richmemont should make the advertising communication to fall in the exclusivity. All luxury products should be exclusive, and Richemont should come out with an idea so that their product value is recognized even desired by those who cannot attain it. Another competitive strategy is by using the cost-based strategies. For luxury goods it is might be a not a good idea to reduce the price of the goods. As the price of a high end luxury goods drop, consumer will see it as low quality goods compared to other similar competitive products. Another way beat the cost base strategies is to increase the price to a reasonable price to increase the perception of the quality of the products. The price increase should be reasonable and should be also expected not to decrease the quantity demand. A good way to determine the price of the goods is to determine the level of income of the consumer. Thus the demand and the income relationship could be determine in order to sustain profitability.